Business Improvement Strategies by zrt20108


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									  Growing Your Business and
     Sustainable Profit,
   Maximisation Strategies

                                 Presented By:
                               Feargal McCormack
                                Managing Partner
                              FPM Accountants LLP
                      Dundalk, Newry, Belfast & Dungannon

FPM Dundalk Seminar
    3 May 2007
           Presentation Context
   Through the Presentation, we hope to make
    successful managers even more successful – by
    significantly enhancing their practical financial
    management skills and awareness of profit
    improvement strategies.
   No performance is good enough, you have to set
    the bar high, and embark upon an ongoing
    journey of continuous improvement towards
    business improvement, business excellence and
    organisation excellence.
   You need to think globally about your business –
    look at the opportunities and threats and be
    prepared to change, with changing circumstances.
   Keep focused on:
          Controlling costs;
          Low overheads; and
          Watch the pennies (cashflow).
    Presentation Context cont…
   The future belongs to those who plan for it:

               “If you don’t have a destination
                   you will never get there”

       “Remember failing to plan is planning to fail”

   You can analyse the past, but you must design the future.
    Design means putting things together to deliver a value
    added solution to meet or exceed client / customer
    expectations and thus deliver market differentiation.
   Key to business success / profitability is management.
    Although business is all about people and relationships,
    astute integrated financial management is pivotal to overall
    performance of business.
          Presentation Outputs
   Enhanced understanding of:
    •   Profit from Quality and Customer Care
    •   Commercial Profitability
    •   Cost Behaviour
    •   Profit Improvement Strategies
    •   Cost Reduction Strategies
    •   Risk Management

   Slides – Aide-Memoire
“profit from quality and customer
      - sharing the FPM experience
                              FPM quality customer focused
                       • INTERNAL
                                       Service profit chain
                        SERVICE QUALITY              QUALITY = LONG TERM PROFITABILITY
                                                                (BOOMERANG PRINCIPAL)
                              • EMPLOYEE SATISFACTION

                                          • EMPLOYEE RETENTION

                                                  • EXTERNALSERVICE
                                                              • CUSTOMER

                                                                     • CUSTOMER

      Quality                                                                • PROFIT
Culture and Attitude                           Quality
Service Innovation                           Initiatives
    Technology                                  TQM
   Development                               ISO 9001
                                          Utilisation of IT
                              FPM quality customer focused
                       • INTERNAL
                                       Service profit chain
                          SERVICE QUALITY          QUALITY = LONG TERM PROFITABILITY
                                                              (BOOMERANG PRINCIPAL)
                                 • EMPLOYEE SATISFACTION

                                            • EMPLOYEE RETENTION

                                                 • EXTERNALSERVICE
                                                         • CUSTOMER
Investors in People
                                                                 • CUSTOMER
Careful Selection                                                   RETENTION
Training Needs Analysis
Thoughtful Training / Coaching
Staff Appraisal System
                                                                          • PROFIT
Flexible Working Arrangements
Work / Life Balance Promoted
Employee Satisfaction Survey
                               FPM quality customer focused
                        • INTERNAL
                                        Service profit chain
                            SERVICE QUALITY            QUALITY = LONG TERM PROFITABILITY
                                                                  (BOOMERANG PRINCIPAL)
                                      • EMPLOYEE SATISFACTION

                                                • EMPLOYEE RETENTION

                                                     • EXTERNALSERVICE
                                                             • CUSTOMER

                                                                     • CUSTOMER
Effective Communications/Engagement
Letters/Website/Client Matters                                                • PROFIT
Newsletter/Regular contact with Clients.
Clients Charter
Service designed to meet targeted customer
Client satisfaction questionnaires / feedback
Pro-active and committed to making a value
added difference to clients
Customer Care Focus Groups
Referral opportunities created
                      FPM quality customer focused
                               Service profit chain
                                             QUALITY = LONG TERM PROFITABILITY
                                                        (BOOMERANG PRINCIPAL)

In summary:
Invest in and Develop Quality Staff
= Commitment to TQM culture and IT development
= Employee Retention
= Customer Satisfaction
                           FPM quality customer focused
                                    Service profit chain
                                                    QUALITY = LONG TERM PROFITABILITY
                                                               (BOOMERANG PRINCIPAL)

Customer Satisfaction
= Customer Retention
= Referral Business
= Long Term Sustainable Profitability and International
How do we assess Cost of Quality

      CoQ is the cost of errors
   Rework
   Inspection
   Prevention

Cost of failure -15 to 25% of turnover
       Commercial Profitability
   Price / Revenue         - (Market Driven)
   COST OF SALES      - (Controllable/Internal)

Thus establishing the correct price and determining
whether it is possible to make the sale at a profit
requires an undertaking of cost behaviour and careful
analysis of:-
   Sales Price
   Cost of Sales
                    (Consider using timesheets)
          Simple Manufacturing Case
       Annual Turnover             €545,000
       Contribution to Gross Profit€187,326 (34.4%)

Division      Product   Turnover    Product Gross   Contribution to
                           %        Contribution     Company’s
                                                     Gross Profit
                A        €145,515      €37,834          €37,834
X                         26.7%         26.0%            20.2%
                B        €103,005      €11,227          €11,227
                          18.9%         10.9%            6.0%
                C        €31,610        €9,957           €9,957
Y                         5.8%          31.5%             5.3%
                D        €104,640      €30,659          €30,659
                          19.2%         29.2%            16.4%
                 E       €148,240      €93,095          €93,095
Z                         27.2%         62.8%            49.7%
                 F       €11,990        €4,556           €4,556
                          2.2%          38.0%             2.4%
      Purposes of Costing

Costing has two major purposes:-

 1) To determine the level of profit

 2) For use in decision making
                Cost Behaviour
   Costs are a major contributing factor, to net profit,
    cashflow and return on investment.
   Specifically, we’re going to look at what causes
    costs to rise or fall and what you can do to
    influence results.
   Costs are your investment in revenue generating
    activities – without costs you have no business.
    Thus while it is important to focus on business
    growth and revenue generating activities, there
    should at the same time be a constant review of
    costs and business processes, with the goal being
    to get the best possible return on your investment.
   Cost creep (i.e. costs creeping up) is at the bottom
    of many business failures, so a knowledge of cost
    behaviour is a good protection.
     Understanding and Analysing
   Activities drive costs
   Traditional accounting systems monitor
    consequences rather than causes
   It’s important to know where each
    particular cost arises in the business
   Does the activity provided by incurring
    that cost contribute to the objective of
    making money?
                Working on Costs
Working Definitions
    Variable Costs: These costs vary directly with sales
     revenue, in other words when sales rise or fall,
     they rise and fall.
    Fixed Costs: These are those costs that are
     incurred irrespective of whether or not any sales
     are made. They are usually associated with the
     physical capacity of the business to provide its
     service to customers.

Important note: fixed costs are only fixed within a certain timeframe.
ALL costs are subject to change over the long term (e.g. rent may be
fixed for 3 years, but it is likely to increase on renewal of the lease;
interest rates can move)
  Understanding Cost Behaviour:
         Some Examples

Some costs can be either fixed or
variable depending on circumstances.

We’ll look at two examples:

   Cost Of Goods Sold
   Wages
        (1) Cost of Goods Sold
   Cost of goods sold is what the company
    spent to make the things it sold
   COGS directly affects profit so the aim is
    to minimise them
       Gross Profit = Sales – COGS

   COGS drivers can be variable with sales or
    • Raw materials costs tend to vary with sales
    • Production labour is basically fixed in the short
      term (few businesses can simply lay people off
      if sales fall for a month)
    Working with the COGS Drivers

   COGS is driven by:
    • Physical volume of sales
    • Cost incurred to buy or manufacture those

   Options are:
    •   Increase selling price
    •   Reduce buying costs
    •   Change to more profitable sales mix
    •   Improve efficiency of production process
               (2) Wages

   Wages: the remuneration paid to
    hourly paid employees for the work

   Wage drivers can be variable or fixed
    Working with the Wage Drivers

   Wages are driven by:
    • Number of team members
    • Qualifications
    • People are a major cost driver in every
      business (bank on 20% on-costs on top of

   Account separately for:
    • Sales people
    • Direct labour costs
    • Support team wages costs
   Simple Illustration of Direct
           Labour Cost
      Case Study - George

Gross Salary                20,000

Other Costs – 20%
(Pension, Employers PRSI,
Group Schemes)               4,000

           Case Study - George
Total Hours Paid               1,950 hrs (52wks X 37.5hrs)

Actual Hours Worked   1,650 hrs (44wks X 37.5hrs)

Actual cost per       €24,000 = €14.55
workable hours         1,650

NOTE 2: Cost per hour is NOT   €20,000 = €12.12
       Contract / Job Costing

   Calculation of overhead recovery

All Overhead Expenses excluding Direct
  Labour / Sub-Contractors & Materials
          Direct Labour Costs
         Overhead Recovery Rate
           – Simple Case Study
X Ltd. - Trading, Profit & Loss Account
For Year Ended 31-Dec-x1                  €         €

Sales                                         500,000

Materials                           175,000
Direct Labour                       150,000
Sub-Contractors                      25,000
Cost of Sales                                 (350,000)
Gross Profit                                   150,000

Overheads (Appendix 1)                        (108,000)
NET PROFIT                                      42,000
      Overhead Recovery Rate
           – Case Study
X Ltd. - Appendix 1 - Overheads
For Year Ended 31-Dec-x1
Indirect Labour                   70,000
Postage, Stationery & Adv.        3,700
Insurance                         4,000
Light & Heat                      5,000
Telephone Fees                    2,200
Repairs & Maintenance             1,500
Rent & Rates                      3,000
Travel & Subsistence              4,000
Bank Interest & Charges           4,600
Sundry Expenses                   10,000

TOTAL OVERHEADS                   108,000
          Overhead Recovery Rate
               – Case Study

Overhead Recovery Rate (OHR)

OHR   =     €108,000

      =     72% of Direct Labour Cost
    Profit Improvement Strategies:
      How to Make More Money

   There are four things that you can
    work at to improve your profit:
    • Price
    • Volume of Sales
    • Variable Costs
    • Fixed Overheads
             Working on Price
   You can increase profit by increasing
    • provided that any reduction in volume does not
      offset the effect of the price increase on the margin
   You can increase profit by decreasing
    • provided that the increase in volume is sufficient to
      offset the reduction in margin caused by the
      reduction in price
    How Much Additional Volume do
       I need if I cut my Price?
                       Gross Margin
           %    20    25    30    35   40
           4    25    19    15    13   11    30% GP%

           6    43    32    25    21   18
Price      8    67    47    36    30   357   Increase
Decrease                                     to Give
           10   100   67    50    40   33    Same
           12   150   92    67    52   43
   What Volume can I Afford to Lose
        if I Increase my Price?
                      Gross Margin
           %    20   25    30    35   40
           4    17   14    12    10   9    30% GP%

           6    23   19    17    15   13   Volume
Price      8    29   24    21    19   17   to Give
Increase                                   Same GP
           10   33   29    25    22   20

           12   38   32    29    26   23
          Working on Volume of
   You can increase profit by increasing
    volume of sales
    • Provided that price remains constant so that
      the increase in volume translates in higher
      gross profit
   You can increase profit by decreasing
    volume of sales
    • Provided that the resultant saving in costs
      outweighs the reduction in gross profit arising
      from the decrease in volume
     Working on Variable Costs
   You can increase profit by decreasing variable
    or activity related expenses
     • provided that there is no change in product or
       service quality that could have a consequential
       effect on sales volume

   You can increase profit by increasing variable or
    activity related expenses
     • provided that the improvement in product or service
       quality allows you to win greater market share or
       premium price
       Working on Fixed Costs
   You can increase profit by reducing fixed
     • provided that sales revenue does not decline or if it
       does, the reduction in revenue is less than the
       saving in fixed expenses


   You can increase profit by increasing fixed
     • provided that there is a resulting increase in gross
       profit from greater market share or higher gross
Cost Reduction Strategies

Why Should you Reduce
         Reduce Costs to …..

   Remain Competitive
   Increase Profitability / Reduce Losses
   Increase Personal Income
   Buy More Technology
   Develop new Products / Services
   Invest for the Future
It is Easier to Reduce Costs
      than to Achieve a
        Price Increase
         Improvement Targets
                         1%   2%   3%   4%   5%   Timescale

Efficiency Savings €’s

Material Savings €’s

Purchasing Savings

€’s e.g Plant Hire

Quality Savings €’s
 Management Information

  The quality of information is
           important to the
    Decision Making Process,
which in turn is key to Management
           and Profitability
Improvement in performance can only
be achieved if it is measured against a
standard and any shortfall analysed
and corrective action taken in a
systematic and procedural way.

            Risk Management
   Risk management is now an intregal aspect of
    best business practice and should be a core
    objective of any business organisation. Taken
    alone, a risk review enables the proactive control
    of fundamental risks, however it also serves to
    inform and improve other activities including
    strategic planning, operational efficiency and
    systems development.
   Business is all about taking risks, however the
    ability to take calculated risks and to win, relies
    on having a deep understanding of the nature
    and impact of those risks. Positive and proactive
    recognition and management of risk should be a
    key business process for all organisations.
      Risk Management cont…
   Good governance is all about managing
    risk. The business environment demands
    that directors and managers take
    appropriate and reasonable action to
    control the risks facing their organisation.
    The regulatory framework demands that
    organisations are able to demonstrate the
    legal and reasonable basis for their
    actions, if and when problems arise.
      Risk Management Policy
   It is key to the ultimate long term
    sustainability of a business that it has a
    risk management policy in order to ensure
    the embedding, awareness and
    management of risk throughout its
  Risk Management Process

    Governance                        Strategic

 Physical                                Operational
                         Filter and
Compliance                                Reputational

             Financial                People
Risk Register

     The Company’s
   Fundamental Risks
     Prioritised and
 Documented According
to their Potential Threat
Current Risk Management

      Are you Currently
        Managing the
     Fundamental Risks
           Concluding Remarks
In conclusion:

   The world is full of talented people who have failed.
   Running your own business is the greatest game in
   Business is all about people and relationships,
    persistence beats resistance. You must get up and
    get up again and keep going.
   An entrepreneur is a person who has the vision to
    see the future and the passion to make it happen.
   In most businesses the two most important assets
    are off the balance sheet, that is, the business’s
    clients / customers and the people who work in the
   Concentrate on what you are good at – and get
    help where you are weak.
“FPM is a client focused

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