DeWITT — Business owners should establish an effective business-planning process, prepare a detailed sales and marketing plan, and improve their supply-chain management. These three recommendations were part of a presentation titled “Ten suggestions for improving profitability and increasing business value” during the recent Dannible & McKee, LLP 40th annual tax & financial planning conference. The […]
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DeWITT — Business owners should establish an effective business-planning process, prepare a detailed sales and marketing plan, and improve their supply-chain management.
These three recommendations were part of a presentation titled “Ten suggestions for improving profitability and increasing business value” during the recent Dannible & McKee, LLP 40th annual tax & financial planning conference.
The Syracuse–based accounting firm Dannible & McKee on Nov. 9 held the event at the DoubleTree by Hilton Syracuse, near Carrier Circle in DeWitt.
Victor Vaccaro, Jr., a certified public accountant and audit partner with Dannible & McKee, conducted the hour-long session.
“The objectives of this presentation ... We’re really going to emphasize that it’s important to establish goals in your business. We’re going to talk about tools that could help you achieve those goals and hopefully in the end, stimulate some action plan,” said Vaccaro.
He started his presentation asking what are the “most important” goals of every company? His answer to the question was: providing an annual return on the capital investment in the business and providing growth in the value of the capital investment.
But firms, Vaccaro noted, often “do not focus” on the goals, citing reasons that include companies may establish other goals “with no clear link” to increased business value. In addition, many small businesses focus solely on profitability with no consideration for long-term increases in business value.
Vaccaro used his presentation to discuss 10 techniques to increase profitability.
“Everyone of ‘em on the screen starts with some action word,” Vaccaro noted.
1. Establish an effective business-planning process
Vaccaro recommends establishing a business plan with goals, budgeting, a “commitment” to achieve the goals, and an eventual plan evaluation.
“You need to determine who you are. This doesn’t need to be some overly complex strategic plan. This doesn’t mean you need to hire a consultant to do this,” he said.
Essentially, if a budgeted expenditure cannot be linked to a business strategy, “the funds should not be spent,” he stressed.
Vaccaro also advised business owners to remember that effective budgeting is part of a continuous planning process, not a once-a-year exercise.
2. Determine your business value and succession plan
For most closely held businesses, the value of the business is by far the largest investment of the business owner, according to Vaccaro.
Still most owners have never had a valuation performed for their business and don’t have a true sense of its value.
“Often times we find that the owner doesn’t really know what the value of the business is,” said Vaccaro.
Valuations of closely held businesses fall into any one of three general approaches, including an asset approach, an income approach, and a market approach.
Under the asset approach, the value of the business is based solely on the value of the entity’s assets net of liabilities, including both tangible and intangible assets. The income approach is the “most widely used” method of valuing a closely held business where value is the sum of the present values of the expected future economic benefits attributable to the ownership interest. Under the market approach, the value of a closely held business is determined by reference to the market values of comparable companies who are either publicly traded or were recently sold in the private marketplace.
Succession plans can either be internal, involving existing employees or family members, or external, involving someone currently outside the business.
3. Prepare a detailed sales and marketing plan
The quantity and quality of your sales drives all else within your business, Vaccaro said.
Do you have a written sales and marketing plan defining what you will sell and how you will sell it? he asked.
A sales and marketing plan should provide details for all aspects of your sales process. The plan should be updated on a regular basis.
“We need to consider ... are we really marketing the business right now to take advantage of all opportunities to help us currently and to set us up for best sales in the future,” said Vaccaro.
He recommended business owners consider best practices that should be included in a sales and marketing plan.
4. Consider activity-based costing/management (ABC/M)
ABC/M is not just for manufacturers, Vaccaro noted, indicating that concepts are being applied to all types of businesses.
ABC/M is a concept. It is not necessarily a system that must be implemented and often can work offline from your accounting system, according to Vaccaro’s presentation.
ABC/M is a process that assigns overhead costs based on consumption. Key factors for ABC/M include more accurate cost-management methodology, a focus on indirect costs (overhead), tracing rather than allocating each expense category to the particular cost object, and making “indirect” expenses “direct.”
Numerous specialized software packages are available for use in applying ABC/M, Vaccaro told attendees.
5. Perform a customer-profitability analysis
The suggestions also included performing a customer-profitability analysis. “Why do you actually need to perform some analysis in this area? Because those customers that are really your best customers … you want to price their products or services effectively. You want to give them the right amount of attention … For some customers, there’s hidden costs in there that you’re not seeing that makes it more costly to service them … More advertising to obtain those customers,” said Vaccaro.
The presentation included the question, “Are overhead and administrative costs significantly different for different customers or customer segments?”
Do costs differ for advertising, sales, distribution, returns, and allowances? Are there higher collection costs for people who don’t want to pay it?
“All of those things are real costs to your business and should go into looking at which customers are more profitable than others,” said Vaccaro.
Such an analysis “goes hand in hand” with the activity-based cost concept that Vaccaro discussed. “It really results in you knowing more about your customers, potentially helping you to make them better customers for you. As you’re able to quantify some of these things that are driving costs, you can look at it and say maybe it’s not making sense,” he said.
As an example, Vaccaro said maybe a business is spending so much in a sales effort for a category of customers, it might decide to charge them more or abandon that customer segment altogether.
6. Analyze pricing of products and services
The price of a product or service is often market driven, according to Vaccaro’s presentation.
Drawbacks of determining sales price using a cost approach include potential for lost sales when the cost is too high, lost profits when cost is too low, and potential for lost sales and profits when a business doesn’t know the cost.
The benefit of determining sales price using a market approach includes stimulating analysis of internal procedures to reduce costs, allowing for additional sales opportunities when cost structure can be modified to achieve the target cost, and providing the opportunity to focus on products or services that will produce more profits.
The major factors for determining a market price are competitors and customer value. A business should know what competitors are doing, document information about competitors’ pricing, and maintain a history of that information. A business should also keep documentation on customer reactions to pricing changes.
7. Improve your supply chain management
Implementing a plan for supply-chain management can “significantly” improve profitability, according to Vaccaro.
If a large portion of your product or service is purchased from suppliers, the supply base can “significantly” impact the cost, quality, innovation, and speed to market.
Businesses should determine how well they know their suppliers and examine “strategic sourcing, including development of a written plan for the purchasing of the most important materials, supplies, and services.
A business could also focus on supplier development, such as communicating to them when they’re not performing as a company would like.
8. Evaluate business acquisitions and sales
Successful companies continuously evaluate possible business acquisitions and sales. This can be part of an overall determination of the return on investment (ROI) for assets deployed within the business and other investment alternatives.
Acquisitions could involve buying direct competitors or may provide for entry into new markets.
Selling or closing unprofitable areas of your business should also be regularly evaluated. If the price is right, you might also sell profitable parts of your business or even the whole company, Vaccaro said.
9. Enhance financial-statement analysis
A company “must go beyond” the basic statements. The balance sheet and income statement are only the starting point for successful financial management. Applying other financial-statement analysis methods is a necessary step in analyzing the success, failure, and progress of your business.
Other types of financial-statement analysis include fluctuation analysis, common size financial statements, budgets and forecasts, ratio analysis, industry comparison, and use of detailed financial reports, per Vaccaro.
Improved financial-statement analysis can help companies to locate and correct accounting errors, identify areas for business improvement, identify more problem areas and react to problems more quickly, better understand the interrelationship of accounts — which in turn will help you to devise better solutions to the problems identified; monitor success or failure of business initiatives, and help to identify business opportunities.
10. Upgrade personnel management and compensation policies
Performance is created by the quality of the people working for you, according to Vaccaro.
He advised attendees to take a “hard look” at their employees, and they should “continuously” evaluate whether changes are needed. Companies should also reward the top performers, “even in down times.” They should also get rid of the non-performers and those with bad attitudes. He also advises business owners to bring a “positive culture” to their companies.
