![](images/top1.gif) |
|
|
What
You Can Measure, You Can Manage |
|
|
|
![](images/2002-NovDec/yellow_taly.jpg)
|
Our mission is to provide information and strategies
to business owners and managers for improvement
in the effectiveness of its business management
so that key objectives can be realized.
|
|
Ted Hofmann
- Principal/Senior Consultant
John Morre - Principal/Senior Consultant
Linda Panichelli - Principal/Senior Tax
Consultant
CFO Plus, LLC
1450 Grant Avenue, Suite 102
Novato, CA 94945-3142 |
Home Office |
: |
415-898-7879 |
Toll
Free |
: |
866-CFO-PLUS
or 866-236-7587 |
Fax |
: |
415-456-9382 |
Email |
: |
thofmann@cfoplus.net
jmorre@cfoplus.net
lpanichelli@cfoplus.net
|
Website |
: |
www.cfoplus.net
|
|
|
![](images/top-end.gif) |
|
![](images/arrow-up.gif)
![](images/arrow-down.gif) |
Why
Performance Measurement Works
What is performance
measurement? Isn’t it simply the calculation
and statement of profitability? Well, the short
answer is yes and no! Performance measurement
is the ongoing study of an organization’s overall
health. More specifically, it is the study of
both financial and non-financial measurement results.
Financial performance measurements, such as financial
statements, are historical in nature. Non-financial
performance measurements, such as a customer satisfaction
survey or a time-and-motion study, allow an organization
to look at its performance in real time.
This allows immediate adjustments to be made based
on results yielded. The study of measurable performance
indicators is essential for an organization to
achieve its short-term objectives as well as it's
long-term, strategic goals.
How many times
have you seen a corporation’s stock take a plunge
when its quarterly earnings missed Wall Street’s
expectations by just a small percentage? This
obsession with quarter-over-quarter profits seems
to encourage many managers to focus on short-term
results at the expense of investing for the long
term. In other words, to many corporations, everything
is viewed in terms of the "bottom line."
Opponents of this school of thought claim this
is a one dimensional view. That is, financial
indicators alone provide an incomplete set of
management tools to corporate decision makers.
Professor Robert S. Kaplan of the Harvard Business
School states: "...if senior managers place
too much emphasis on managing by the financial
numbers, the organization’s long-term viability
becomes threatened."
So, what are these
non-financial performance indicators? Are they
different for different industries? A joint industry-government
Benchmarking Study Report on Performance Measurement
from the late 1990s stated, "Regardless of
size, sector, or specialization, organizations
tend to be interested in the same general aspects
of performance. Attention to, and establishment
of, measurements in these areas is thus a significant
part of a successful performance system."
These areas include:
- customer
satisfaction;
- employee
satisfaction;
- internal
business operations; and
- shareholder
satisfaction
Customer
Satisfaction. When it comes to mapping
performance, many of the blue-chip corporations
rely on customer- and employee-based measurements.
Achievements in these areas are considered to
be just as important to the success of the corporation
as revenues, profits and other financial measures.
Customer satisfaction relates to the overall customer
experience, including price, quality, delivery,
service and warranty. The business objective is
to establish real-time performance measures to
determine customer satisfaction in those areas
that are most important to the customer.
Such performance measures might include survey
responses, post sale contacts, complaint lists,
market share analysis, warranty claims and other
such data that may be unique to the industry or
organization.
Before deciding
on specific measures, an organization should identify
and thoroughly understand the processes to be
measured. Then, each key process should be taken
apart and analyzed to ensure a thorough understanding,
and to ascertain that an appropriate process is
chosen. In most cases, targets, minimums and
maximums should be set for each measure. In some
instances, performance measurements of customer
service have resulted in customer satisfaction
improvements of up to 50 percent! You can quickly
see how this performance measure can dramatically
impact the bottom line.
Employee
Satisfaction. Employee-oriented measurements
are designed to encourage innovation, mutual trust,
teamwork and diversity. This allows the corporation
to focus on excellence in the human elements that
contribute to their joint success. Human capital
development is not about keeping score. It’s
about learning how to motivate people and how
to link those performance measures with both financial
and non-financial incentives. Blue-chip corporations
generally set challenging long-term goals and
link the compensation of their employees more
closely to the completion of those goals. Without
motivated human resources, an organization will
not achieve its strategic goals. Performance measure
improvements in this area have shown average increases
of up to 15 percent.
Internal
Business Operations. Internal performance
measurement is a particularly fertile area for
achieving improvement in the organization’s long
term viability. The sheer volume, variety and
complexity of the production process for tangible
goods gives rise to a long list of indicators
that might be measured and controlled. Such a
list might include time and motion studies, production
line efficiencies or down-time, inventory levels,
product life cycles, etc. Similar performance
measurement indicators should be devised for all
operational and supporting areas. The goal of
such measurements is to ensure that products move
smoothly through the production cycle to meet
quality standards and customer delivery schedules.
Expense control,
regulatory compliance and quality control falls
within every business in every industry. In a
study published by W.B. Abernathy, PhD, "Managing
Without Supervising" these areas showed an
average improvement of 9 percent, 54.7 percent
and 30.6 percent respectively. Each industry can,
with guidance, develop effective performance measures
that will achieve key objectives.
Shareholder
Satisfaction. Any organization is ultimately
accountable to its shareholders. In the owner’s
mind, the principal measure of successful performance
is usually profit. However, many owners take
a longer term view of the organization’s future
potential. In this regard, they may be interested
in non-financial performance measurements as a
basis for comparison with other organizations.
Most blue-chip
organizations use performance measurement systems
to determine whether they are fulfilling their
vision, achieving their short-term objectives
and meeting their customer-focused strategic goals.
The measures and goals are narrowly focused on
a critical few. It is neither possible nor desirable
to measure everything. The focus should be on
achieving organizational goals via performance
measures, and not the measures per se. If a particular
measurement cannot be linked back to strategic
planning, it should be eliminated to avoid data
overload. According to William Apler of the Hay
Group, "The top organizations create performance
measures that focus on all the drivers of their
businesses financial performance, shareholder
value, employees and customers."
Unlike historical
financial information, non-financial performance
measurements allow an organization to make ongoing
changes in real time. This provides the
tools to look ahead and adjust according to circumstances.
Excellence in all performance areas will result
in the "bottom line" taking care of
itself. That is the true value of performance
measurement. Remember, if you can measure it,
you can manage it. To learn more about how you
can use performance measures to boost your company’s
profits, give us a call today.
|
|
|
|
|
![](images/2002-NovDec/purp_taly.jpg)
|
Our mission is to provide information and strategies
to business owners and managers for improvement
in the effectiveness of its business management
so that key objectives can be realized.
|
|
Ted Hofmann
- Principal/Senior Consultant
John Morre - Principal/Senior Consultant
Linda Panichelli - Principal/Senior Tax
Consultant
CFO Plus, LLC
1450 Grant Avenue, Suite 102
Novato, CA 94945-3142 |
Home Office |
: |
415-898-7879 |
Toll
Free |
: |
866-CFO-PLUS
or 866-236-7587 |
Fax |
: |
415-456-9382 |
Email |
: |
thofmann@cfoplus.net
jmorre@cfoplus.net
lpanichelli@cfoplus.net
|
Website |
: |
www.cfoplus.net
|
|
|
![](images/top-purp-end.gif) |
by
Michael E. Duffy |
![](images/arrow-purp-up.gif)
![](images/arrow-purp-down.gif) |
I had lunch with
a small business owner the other day, and we talked
about the ways he's using technology in his business.
Following our lunch, I sent him an e-mail with
some questions that I thought might provoke his
thinking. One of them was this:
What sort of daily
aggravations exist for you and your employees?
If you are repeatedly banging your head on a problem,
it's sapping the energy of you and your organization.
Best to deal with it immediately.
This is what he
wrote back to me, edited only slightly to preserve
his anonymity:
Increasingly, I
am beginning to question the ability of technology
to assist in running my businesses. At the very
least, I feel we have reached a point of diminishing
returns. The daily aggravations have just about
demoralized us all.
- I never dreamed
what a can of worms e-mail would be.
- I never dreamed
a set of Palm V's could lose two days per week,
and take approximately 10 very competent IT
man-days to troubleshoot synchronization problems,
and be ultimately reduced to the relevancy of
Rolodexes..
- I never dreamed
my staff and I would have to move from a simple
Excel Computer Problem log sheet to an elaborate
email/outlook form reporting and categorizing
system to try and understand where the underlying
network and e-mail problems are coming from.
- I never dreamed
my staff and I would be spending the amount
of unproductive time and money on trying to
band-aid systems that initially promised so
much.
- I never dreamed
we would buy two separate Retail Sales Inventory
packages (one the leader in its industry) and
end up trashing both in favor of developing
our own paper and Excel spreadsheets to track
the simple movement of [items] in and out of
a single building.
- The only thing
I can be proud of, or not ashamed of, is that
we did not run pell-mell into an ill-fated Web
site.
Right now, ...
I am being forced to question our increased application
of technologies.
And you thought
you were having a rough week! He went on to add
this:
Technology had
served us well previously. We were one of the
first small businesses to develop our own in-house
Inventory and Sales database management tracking
systems, some 13 years ago. It has served us immeasurably.
Although it may be somewhat clunky by today's
SQL, 3-dimensional, approaches, we can get the
facts we need to make informed decisions quite
quickly, almost interactively, as we assess the
need to buy from a particular [supplier]. Many
have commented that they have seldom seen such
an elegant and flexible approach to sales and
inventory based knowledge. I have not found an
off the shelf replacement yet that even comes
close to what we can do.
So, here's a guy
who used to be happy with technology who's about
ready to throw in the towel. What went wrong?
More important (to him, at least), where does
he go from here?
This company started
out on the right foot: they knew the basic information
they needed to run their business effectively:
- Which items
are selling well?
- How much do
we have in inventory?
They hired someone
to build a system to produce that information,
using DataFlex, a DOS-based tool which allowed
for more efficient development (and hence, produce
the desired system at a lower cost).
For some period
of time, all was well: They had a stable system
which provided information invaluable to running
their business effectively. This echoes my original
point: eliminate day-to-day aggravations caused
by technology. A stable system is generally better
than an unstable system with improved features.
Eventually, of
course, Windows and Microsoft Office entered the
picture. Of itself, this isn't a bad thing - I'm
using Word to write this article (although
I still prefer Eudora to Outlook). But the old
DOS-based system and the new Windows-based systems
didn't play well together in a networked environment.
Rather than backing up and re-attacking the problem
strategically, this company got into a tactical
fire-fighting exercise with their existing problems,
plus continued adding new features (like e-mail,
Internet access, and handheld devices).
When you have to
build a system to keep track of the problems you're
having, alarm bells are ringing, whether you hear
them or not. Although there's a logical desire
to try and solve the problem yourself, it can
be extremely cost-effective to get an outside
opinion. And if the suggested solution appears
to be costly, it's worth getting a second opinion.
One of the best
questions to ask is: What problems like this have
you encountered before, and how did you solve
them? Don't settle for unclear answers with lots
of jargon. Although there are exceptions to every
rule, the person most likely to solve your problem
has already solved it several times before. That
experience is what you are paying for. There are
no free lunches.
At this point,
the key to my acquaintance's business recovery
lies in reexamining the goals of his business,
and the needs of its customers. In fact, I asked
my lunch companion what customer benefits had
resulted from all the new technology? Aside from
sales people being able to e-mail potential customers
pictures of items for sale, his answer was, "None."
So, my recommendation
to this gentleman (and any of the readers facing
a similar test of courage) is to simplify and
stabilize before adding any more technology to
the mix. Stabilize the systems which provide essential
information about operations, and focus any remaining
resources on those systems which provide direct
benefit to the customer. Once your blood pressure
has returned to near-normal, take a look at your
business goals and unmet customer needs as a guide
to what to do next. Of course, I'd also recommend
you get a second opinion.
And sell those
Palm Vs on eBay, before it's too late. Everyone
knows that the PocketPC is the wave of the future!
By the way, there's
a happy ending to the story. After spending several
thousand dollars to test and replace network wiring,
his network is running happily, and the morale
of his employees has improved significantly. I
wish I could claim credit for the outcome!
Mike Duffy writes
the monthly technology column, Tech Talk, for
Sonoma Business Magazine (http://www.sonomabusiness.com).
His Web site URL is www.mikeduffy.com. © 2002
Michael E. Duffy & Associates. Reprinted with
permission. |
|
|
|
![](images/top1-blue.gif) |
|
|
Marketing on a
Shoestring
|
|
|
![](images/2002-NovDec/blue_taly.jpg)
|
Our mission is to provide information and strategies
to business owners and managers for improvement
in the effectiveness of its business management
so that key objectives can be realized.
|
|
Ted Hofmann
- Principal/Senior Consultant
John Morre - Principal/Senior Consultant
Linda Panichelli - Principal/Senior Tax Consultant
CFO Plus, LLC
1450 Grant Avenue, Suite 102
Novato, CA 94945-3142 |
Home Office |
: |
415-898-7879 |
Toll
Free |
: |
866-CFO-PLUS
or 866-236-7587 |
Fax |
: |
415-456-9382 |
Email |
: |
thofmann@cfoplus.net
jmorre@cfoplus.net
lpanichelli@cfoplus.net
|
Website |
: |
www.cfoplus.net
|
|
|
![](images/top-blue-end.gif) |
PR Secrets for
Free Press
|
![](images/arrow-blue-up.gif)
![](images/arrow-blue-down.gif) |
When a spiraling
economy pinches marketing budgets, it means marketing
money goes away. It doesn’t mean the need for
marketing goes away. In fact, you may need to
market even more.
Luckily, marketing
and that includes public relations
doesn’t have to cost a lot of money. Keep in mind
that what you don’t spend in dollars and cents,
you’ll have to make up in energy, time and creativity.
Simply put, you can make up for a small budget
by rolling up your sleeves and putting your noggin
to work.
So what does it
take to earn free press? It’s pretty simple,
actually. Become newsworthy. Sounds too easy,
right? It often is, and the fact that you aren’t
a PR person is a plus for you. The first thing
you have to do is think like a reporter. For a
moment, take off your owner/manager hat and put
on a reporter hat. The reporter is looking for
a scoop a hot story. She/he’s going to
look good to the editor when she/he comes up with
something that no one else is doing, right? This
is your opportunity to be a reporter’s resource.
Basically, you
want to help the reporter do his/her job. You
want to be on the lookout for stories that will
help the reporter get the scoop. The stories may
be from inside your company, but they could also
be inside your clients’ companies or they may
even be inside a prospect’s company. While getting
PR for a client or a prospect may not sound like
a direct route to getting attention for your firm,
it is.
By offering information
that is not self-serving, you earn reporters’
trust. The best reporters have incredible memories.
They work on tight deadlines and when they need
a quote from a subcontractor about an issue, guess
who they most likely will call first? You are
developing a relationship with the reporter as
a valued news source. Keep in mind that
reporters are bombarded by PR people and others
who want to selfishly exploit the press. You want
to set yourself apart from those types. You want
to appear as unbiased as possible and stick to
the facts.
For example, if
you are working on a project that is different,
unusual, important to the community, or any of
a handful of reasons why something is newsworthy,
call the reporter that covers that beat and tell
him/her about it. Then wait for him/her to ask
for more information. That’s the difference. You
are looking out for him/her not for yourself.
Reporters know people and if you come at them
with any other intention than that which is honest,
they’ll run in the other direction.
So, what could
be news? A store opening? Well, yes. It is especially
if the store is an oxygen bar (something different)
or if the store is filling a critical need in
the community or if the store caters to a sector
of the community that is part of a trend. An Albertson’s
opening in the suburbs where there are plenty
of grocery stores is not news. A Fiesta grocery
store opening in a part of town that doesn’t have
any grocery stores and that caters to the booming
Latino population is newsworthy. See the difference?
The other thing
you want to remember about working with reporters
is that they are busy. When you call, get to the
point. You should practice what you are going
to say so you can sum it up in about 30 seconds.
Before saying anything, ask if it is a good time.
If they are on deadline, they will tell you. When
you hand off the idea, your job is done unless
they need more information. Trust me; they will
contact you if they are interested. If they aren’t,
don’t bug them. The last thing they need is someone
following up asking if they are going to cover
the story. In the end, it’s what they think
is interesting that matters. If you study newspapers,
soon you will be able to discern what is news
and what isn’t. You may think that your new service
offering is the greatest thing since sliced bread,
but will the paper’s readers? Scrutinize your
idea before you let the reporter take a crack
at it.
The way you share
your idea with a reporter is critical. Do the
homework. Share why you think it’s important;
don’t assume the reporter will come to the same
conclusion. If you go to a reporter and simply
tell him/her about what your company is doing,
she/he may not think of it as news. However, if
you explain how this new service is part of a
trend or an answer to a pressing business issue,
the reporter can then see that this is a hot topic
affecting a lot more companies than just yours.
All of a sudden, you are newsworthy!
So, think like
a reporter. Learn how the newspaper works. Request
editorial calendars. And start developing relationships
with reporters. "How?" you may ask.
Well, it’s as simple as making a phone call or
sending an e-mail. No magic. It’s just plain ol’
relationship building. It takes action. Don’t
be afraid. The fact that you aren’t sure what
to do helps you be honest. Simply tell them that
you aren’t sure what the correct methods are,
but you think you could be helpful to them. Reporters
have told me that they truly appreciate being
able to trust a person’s intentions.
Don’t forget to
take part in press “freebies.” Is a new person
joining your company? Did your company recently
promote a person? Won a new contract? Send a press
release to the local business paper. If you have
new team members, announce it by sending one to
the local newspaper as well. For personnel changes,
try to include a picture.
If you develop
your reporter contacts, you will be able to see
your company name in print more often than you
ever dreamed. Most companies spend $2,000 - $5,000
per month to have a PR company on retainer. If
you spend a small amount of your time, you will
be able to accomplish similar coverage for a lot
less than that! |
|
|
|
![](images/top1-green.gif) |
|
|
Year-End
Checklist for Business Owners |
|
|
|
![](images/2002-NovDec/green_taly.jpg)
|
Our mission is to provide information and strategies
to business owners and managers for improvement
in the effectiveness of its business management
so that key objectives can be realized.
|
|
Ted Hofmann
- Principal/Senior Consultant
John Morre - Principal/Senior Consultant
Linda Panichelli - Principal/Senior Tax
Consultant
CFO Plus, LLC
1450 Grant Avenue, Suite 102
Novato, CA 94945-3142 |
Home Office |
: |
415-898-7879 |
Toll
Free |
: |
866-CFO-PLUS
or 866-236-7587 |
Fax |
: |
415-456-9382 |
Email |
: |
thofmann@cfoplus.net
jmorre@cfoplus.net
lpanichelli@cfoplus.net
|
Website |
: |
www.cfoplus.net
|
|
|
![](images/top-green-end.gif) |
|
![](images/arrow-green-up.gif)
![](images/arrow-green-down.gif) |
Looking toward
the New Year can leave owners feeling exhilarated,
exhausted or somewhere in between. As the year
draws to a close, take time to ensure you’ve covered
all the bases and are starting the New Year on
solid ground. While our checklist in no way covers
every important aspect of your business, we hope
it will help you pinpoint areas that may be improved
next year.
Operational
Year-End Analysis
1. Did you meet
your annual goals? If not, do you know why?
2. Is employee productivity
up? Down? Is it a concern?
3. Are profits up?
Down? Do you know why? Is there a correlation
between an increase or decrease in sales to gross
margins?
4. If you sell products,
how much is each contributing to gross profit?
Can you better manage the components of cost of
goods sold for increased profits?
5. If you are in
a services industry, do you know profit margins
on each service you provide? Are your services
cost competitive? Is your profit margin where
you would like it to be?
6. Have you reviewed
your property and casualty insurance coverages
for adequacy? Are your rates still competitive?
Is your broker doing his/her job?
Accounting
and Finance
1. Has cash flow
been a problem this year? Is it cyclical or ongoing?
Do you try forecasting your business? When was
the last time you reviewed your billing and credit
policies?
2. Where does your
annual budget stand? Does your budget process
allow for key manager input and buy-in?
3. Are you maximizing
your supplier/vendor relationships? Do terms need
to be renegotiated?
4. Have you considered
taking full advantage of donating unneeded business
assets to charity?
5. If you are leaving
the company or selling the company in the next
two years, do you have an exit strategy? Have
you taken the necessary steps to maximize company
value?
6. If your company
has outstanding debt, have you ensured that you
have chosen the most appropriate vehicle for financing?
Is this an appropriate time to refinance?
7. Is your accounts
receivable situation secure? Are you prepared
in case primary customers don’t/can’t pay?
8. Have you reviewed
internal controls to ensure your financial concerns
are secure? For example, are duties appropriately
segregated to negate the opportunity for embezzling?
Human Resources
1. If profits are
down, have you explored the relationship between
employee performance and profit?
2. Have you hit
any milestones (e.g.? # of employees) in the past
year that would impact regulatory compliance?
3. Are incentive
compensation plans strategic and aligned with
company goals?
4. If employee attrition
has increased, do you know why? Is it a concern?
Have you implemented a recruiting plan?
5. Do all employees
know what’s expected of them? Do they have the
proper materials, technology and equipment to
do their work right?
6. Are employees
aware of company goals and how their performance
impacts the realization of those goals?
7. In the past year,
have you reviewed your insurance and health policies
to ensure you are paying for only the options
that benefit you, your employees and the company?
8. Are employee
benefits cost-effective for the company?
9. Have you taken
the opportunity to show employees how much their
total salary (salary + benefits) is really worth?
10. Are position descriptions, employee
handbooks, safety manuals and other company communications
up-to-date?
Strategy
and Performance
1. Are you achieving
the anticipated annual revenue and profit growth?
If not, do you know what obstacles are in the
way? Do you plan your growth? Is it written down?
2. Have you arranged
a planning session with your key managers to review
(or set) the company’s strategies and goals for
the coming year?
3. Is the production
line as efficient as possible? Is down-time higher
than last year?
4. Can you reduce
the average collection period on your receivables
to improve cash flow?
5. Do inventory
levels need to be reviewed? Are you storing (and
capitalizing) more than needed?
6. Are internal
systems affecting profitability? Do employees
need to be better trained or educated?
7. Does the company’s
performance depend on a few key people? Is there
any way to cross-train and change this?
8. Is the company
operating at or above industry standards?
9. Are you and your
employees working harder, yet not realizing the
return you expect? What critical performance activities
are causing this?
10. Are there new competitors in your market
that are impacting your business? Do you have
a strategy for this? When was the last time you
did a competitive comparison?
11. Are you minding the business of your
business? Is your strategy in place to take you
through the next year? What worked during the
past year? What didn’t work?
12. Do you have a disaster plan in place
and business interruption insurance in case of
a disaster?
This short list
offers areas to consider to ensure your business
operates successfully. Give us a call so we can
discuss these and others that may be affecting
your company. We can help you make changes now
that are sure to make improvements in the way
you operate your business in the coming year.
|
|
|
|
![](images/top1-grey.gif) |
|
|
Make the Move
to Dynamic Forecasting
|
|
|
|
![](images/2002-NovDec/grey_taly.jpg)
|
Our mission is to provide information and strategies
to business owners and managers for improvement
in the effectiveness of its business management
so that key objectives can be realized.
|
|
Ted Hofmann
- Principal/Senior Consultant
John Morre - Principal/Senior Consultant
Linda Panichelli - Principal/Senior Tax
Consultant
CFO Plus, LLC
1450 Grant Avenue, Suite 102
Novato, CA 94945-3142 |
Home Office |
: |
415-898-7879 |
Toll
Free |
: |
866-CFO-PLUS
or 866-236-7587 |
Fax |
: |
415-456-9382 |
Email |
: |
thofmann@cfoplus.net
jmorre@cfoplus.net
lpanichelli@cfoplus.net
|
Website |
: |
www.cfoplus.net
|
|
|
![](images/top-grey-end.gif) |
|
![](images/arrow-grey-up.gif)
![](images/arrow-grey-down.gif) |
Is your budget
obsolete in two months? The traditional corporate
budget process focuses on what managers are allowed
to spend to accomplish their goals and not what
resources they require. Budget plans can be costly
to prepare, starve departments that have valid
needs, incorporate last year’s inefficiencies
and fail to identify waste and respond to a business’
strategic objectives. However, companies can develop
more realistic, dynamic budgets based on predictive
planning. One way to do this is to use activity-based
costing (ABC)—basing company plans on fluctuating
needs related to demand rather than on historical
data.
Here are some
budgeting tips to keep in mind that incorporate
ABC principles.
- Don’t limit
yourself to the current situation defined by
predetermined spending limits. Begin the budget
equation with the outcomes you expect—profit,
for example—measured against customer and management
demands that vary in mix and volume over time.
Don’t let your budget stay frozen; revisit it
as needed in response to marketplace conditions.
- Budget management
and cost management are not synonymous, so don’t
confuse them. Formulate budget strategies according
to two questions: What should we be doing, and
how should we do it?
- Then inject
costs into the equation. Using activity-based-cost
estimating helps you relate what-if scenarios
over time to the overall impact of expenses
on the organization. For example, are you going
to open a new warehouse? To estimate the level
of spending required in the future, you should
match future capacity (what’s currently available
vs. what’s required) with estimated needs (forecasted
customer demand).
- Activity-based-cost
management is not a replacement for general
ledger accounting. But if your general ledger
software does not convert spending into useful
managerial information, use an ABC model—based
on resources, work activities, process costs
and final cost objects—to reflect market, product,
service-line, channel and customer-oriented
decisions.
- No one knows
in advance how simple or complex a company’s
first ABC model needs to be. Many make the mistake
with their initial ABC system of plugging in
too many details before learning how to apply
the data or what the accuracy requirements are.
Instead, improve the usefulness of the results
by understanding that such predictive planning
depends on constructing a cost-assignment network
that traces how outcomes—such as products or
orders—consume resource expenses with a cause-and-effect
relationship.
- Organizations
always want to understand where they make and
lose money. To get a better picture of this,
design budgets that do not inhibit managers’
flexibility to meet objectives. Develop plans
that are feasible, determine what specific resources
are needed to execute them, then compare the
plans’ projected results with current performance
to manage profit margins.
- Successfully
implementing ABC depends to a large degree on
managing organizational behavior. Avoid resistance
from employees and managers that can jeopardize
the acceptance of the new methodology or technology
by following these rules:
- Use a rapid
prototyping pilot program to quickly implement
a summarized ABC model. Don’t necessarily
start with your most technologically sophisticated
employees; this will stigmatize the project
by making it look like it’s for tech gurus
only.
- Get the
support of an executive sponsor and find
a champion to create interest in ownership
of the information and its uses.
- Make sure
there are end-users who really need the
data—design the system with the ends in
mind.
- Don’t be
afraid to combine art, craft and science
in constructing your ABC model. One that
is successfully prototyped can quickly be
redone with more detail and accuracy so
users readily begin to see how the ABC data
relate to the problems they are trying to
solve. ABC models can provide valuable insights
within weeks that aren’t visible from traditional
data
Gary Cokins
is the author of Activity-Based Cost Management—An
Executive’s Guide, John Wiley & Sons
Inc., Hoboken, New Jersey, 2001. His e-mail address
is gary.cokins@sas.com.
Copyright 2000 © 2001 AICPA, Inc. All Rights
Reserved.
|
|
|
|
|