We Have Meet The Enemy & He Is Us, Dealing with Entrenched Policies & Procedures (Part 2)

On Monday, I introduced the topic of inefficient and outdated policies, processes and procedures using the cartoon character Pogo, and the mid-twentieth inventor and cartoonist Rube Goldberg.

After coining a new acronym (RGP3s) and describing some common characteristics, I ended with the obvious question, what is a manger to do about them?

First, be open to the possibility of their existence in your organization. Every company has some areas that need improvement. You cannot assume that something is “best practices” simply because it worked in the past. If a department is unable to keep up with current workloads, there are only two possible reasons. Either they are understaffed, or they are operating at less than peak efficiency. Adding staff adds costs. Improving efficiencies is likely a cheaper and perhaps faster alternative.

All successful organizations eventually reach a size where managers are not expected to be familiar with the application of every policy, process and procedure. Even if they are, RGP3s can be virtually invisible to the familiar (or complacent) eye. That suggests one of two possible approaches.

The first approach is to constantly challenge and encourage employees to identify efficiency improvement opportunities. Maintain an open and direct line of communication through brief but regular interaction. Actively solicit employee input and implement at least one idea every month. Publicly reward accepted suggestions in ways they value. That may mean an employee of the month plaque in the lobby, a front row parking spot or an AMEX gift card.

Unfortunately, relying solely on employees’ willingness to point out flaws has a major limitation, human nature! People seem to have a tendency to accept most things as they are. Furthermore, asking questions and challenging the status quo may be viewed as career limiting in some corporate cultures. That is not to suggest people are by nature lazy or apathetic. It’s just how things are.

The second approach is to bring in a fresh pair of eyes. A while back, I shared a story about an experience in a new job. On my second day, I was reviewing a lengthy payment report when I spotted something unexpected. About every 20 pages or so, there was an entry with a negative amount. Based on my still limited understanding, there was no reason for negative numbers. To make a long story short, I had stumbled across an internal control weakness that allowed certain items to be paid twice.

The point is that other people who worked with the report every day had undoubtedly noticed negative entries before. Yet they failed to follow through with a few simple questions. If they had, they might have closed the control weakness years earlier.

In closing, let me clarify what constitutes a “fresh pair of eyes”. It may mean a consultant. This outside resource could be an expert in your field, or someone well versed in common business practices and operations. An auditor or independant CPA with other clients in your industry may be a valuable resource, especially if the area of concern is one they review as part of their evaluation of internal controls.

In my example, a fresh pair of eyes merely meant introducing a new employee into the mix.

Either way, the path to improved efficiencies in your business may be as simple as finding someone unburdened by the “But we’ve always done it that way” mentality.

That mindset, Mr. Pogo, is the real enemy.

© 2012 by Dale R. Schmeltzle

WHAT A CPA KNOWS ABOUT MARKETING: MORE SALES AREN’T ALWAYS THE ANSWER

There is an old joke about a marketing executive who bought a truckload of melons from a farmer for $1 each. He advertised them for sale at $0.85. When his CFO asked how he planned make a profit, he proudly replied, “Volume!”

Does that sound absurd to you? Surely, the story must be a throwback to the days before we had MBAs and complex modeling systems to direct our every move.

May I be honest? I have a degree in accounting, and have done graduate work in finance, not marketing. I have never worked in a purely marketing or sales function. Any marketing professional worth his salt has probably forgotten more on the subject then I will ever know. That explains the often-asked question of why a CPA wrote a book called Highly Visible Marketing, and blogs about marketing related topics.

I do not see myself as writing about marketing; at least not as the average person understands the word. I write about a business approach that is foreign to many marketing professionals. It is largely unheard of among small businesses.

I call it marketing accountability.

I focus clients on improving cash flow by growing the bottom line, not the top line. It is that focus that adds value.

Too many business people think like our melon-selling friend. They assume they can make money on any product or service, if they can just sell enough.

As obvious as it may sound, there must be a reasonable and measurable relationship between marketing costs and the expected cash flow and other benefits.

Without that mindset, there is no perceived need to compare costs and benefits. Little or no effort is spent matching expenses and revenues until someone asks why the cash balance is circling the drain or vendors start calling asking where their payment is.

Do you think I might be exaggerating the importance of accountability?

A 2005 study titled Small Business: Causes of Bankruptcy by Don B. Bradley III and Chris Cowdery of the University of Central Arkansas reported that of businesses in their study that filed for bankruptcy, 58% admitted to doing “little to no record keeping.” I assume a business that keeps no records has no ability to compare costs and benefits, let alone manage them.

I encounter this “I’ll make up the difference on volume” mentality with alarming frequency. One of those encounters was the cathartic event that led me to develop my marketing accountability approach.

I had a growing client who had reached $5 million in sales. Unfortunately, losses were growing even faster. They were in desperate straits, virtually out of cash. They thought the answer was to slash expenses and eliminate staff, while continuing to grow sales. In other words, they followed conventional business thinking.

I discovered they were losing money on their largest customer class, where all marketing efforts were directed. Much to their surprise, I did not suggest eliminating a single position. On the contrary, I recommended hiring a marketing person for the profitable customer base. I then directed  procedural improvements to make it easier for those customers to do business with my client. Finally, I suggested an immediate reduction in unprofitable customers.

Even more alarming is how often clients I assume are financially astute fall into the same trap. I worked with a very large company that started a bonus program on their entire product line. The problem was they lost money on some products, primarily because they were underpriced. The bonus structure did not differentiate between products. When sales of already unprofitable products increased, the added cost of bonuses produced a “double whammy” on the bottom line.

An appropriate tactic would have been to reward the sales force for increasing total sales, while also decreasing sales of unprofitable products.

As both examples illustrate, growing sales and increasing profits are not always synonymous. Admittedly, decreasing sales to improve cash flow and profits sounds counter-intuitive to someone lacking a firm grasp of their cost structure.

That is no excuse.

Knowing how to sell something without understanding the economic impact of those sales is a recipe for disaster. Those responsible for a promotion should also be held accountable for its results, good or bad. The ultimate result companies must focus on is how much cash a promotion puts in the bank. It really is that simple!

Does my marketing accountability approach work?

Here is what the client in the first example said, “While many companies are looking to cut back on employees as their first resort to handle cash shortages, CFO America was quick to point out that the right mix of customers was the crucial area of concern. They also were quite helpful in directing us in some marketing improvements that we could make. We are now in the process of implementing changes that are destined to enhance our financial picture.”

I leave you with that quote.

© 2011 by Dale R. Schmeltzle

CFO America: Your Cash Flow Optimization experts

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