star-denver presentation

STAR-Denver PresentationMarch 16, 2018

©Philip Varley March 2018 1

MAXIMIZING PROFITABILITY IN ANY

BUSINESSOr – Failure Is Not An Option – The 12 Step

Plan to Turnaround Success!Philip G. Varley, FCA, MBA, CPA

2©Philip Varley March 2018

My Background

• UK Chartered Accountant • US CPA• International Controller, Division Finance

Director, CFO - NYSE and NASDAQ companies• Three VC start-ups - >$50 million• Since 2001 – CFO/CEO – Eight turn-arounds


Example Results Obtained For Clients• Doubled Revenues - from $30m - $60m

• Quadrupled Profits – from $3m - $14m

• Halved Expenses – by $12m

• Most Interesting Loss Reversal - $4m by tax

restructuring in France

• Most Significant Loss Reversal (for owners)

– $1m loss to $1/2m profit changed a foreclosure

notice to a sale of company for $2.5 million

• Most Significant Value Enhancement (for VCs)

– $32m sale from $2m profit increase


Most Stressful ?


Results Obtained For Clients

• Most Stressful– merger of two bankrupt companies each losing $3

million annually– neither with adequate accounting records (one

didn’t have a CFO, the other’s was “creative”)– one in Boulder, one in DTC – cultural issues– subject to numerous lawsuits

• Became a profitable stand-alone entity


GOALS FOR TODAY

• To be able to identify strategies that you can use in your businesses, or your clients’ businesses, to significantly increase their profitability.


SO HOW DO WE INCREASE PROFITS? I’m a pilot, and we’re using flying analogies!


SYNOPSIS OF THE 12-STEP PLANPROFIT IMPROVEMENT PLANS ARE SIMILAR TO FLIGHT PLANS

FLIGHT PLAN BUSINESS PLAN• Decide where we want to go Regain/improve profitability

• Planning Budget

• Preparation Identification of losses

• Take Off Start implementation

• Navigation Forecast

• Way Points Compare actual to forecast

• Successful landing Stand alone entity


SYNOPSIS OF THE 12-STEP PLAN

• Where are we going? 13 week cash flow forecast• How are we going to get there? Receivables and cash collections• Have we got a map? Organization Chart du jour• How much will it cost? Payroll – overtime, drug free policy• How will WE benefit? Benefits• Will we enjoy ourselves? Travel and Entertainment• Isn’t it risky? Professional fees and risk management• Resources Bank accounts• Replenish resources Purchasing• Efficiency Margin analysis – product or customer• Efficiency Transportation costs• Free money!! Property, sales and use tax• Out of the box thinking International tax structure


Let’s Turn Around Before It’s Too Late!


STEP 1The 13-Week Cash Flow Forecast

• Underperforming companies don�t have one, and good ones may not use to full advantage

• It is THE KEY to Everything• It CONTROLS actions• Everything is in one place – on one sheet of paper• Shows ALL revenues and expenses – as granular as

you like• Provides a Daily or Weekly cash balance


STEP 1 – THE CASH FLOW FORECAST

• The most critical document for any company:– Ensures you don’t run out of cash– Enables you to control every aspect of a business


Example First 4 weeks of a Cash Flow ForecastClassification Week 1 Week 2 Week 3 Week 4Cash in bank – start of week 0 392,000 (175,000) (220,000)

REVENUE (cash rec�d basis)

800,000 1,000,000 250,000 1,400,000

EXPENSES (on a date paid basis)

Payroll 1,207,000 900,000

Rent, Property Tax 50,000

T+E 50,000 50,000 40,000 30,000

Bank Loans 300,000

Professional fees 30,000

Manufacturing Supplies 258,000 230,000 210,000 180,000

Vehicle Operating Costs 50,000 50,000 45,000 40,000

NET CASH FLOW 392,000 (567,000) (45,000) (50,000)

Cash Balance 392,000 (175,000) (220,000) (270,000)


STEP 2 – COLLECTING CASH. THE TOP LINE OF THE CASH FLOW FORECAST

• The key to getting what’s yours – and the easiest way to enhance available cash

• Managing Receivables – a sale is not a sale until cash is in the bank

• Sales Management– The CFF links revenues and receivables. Shows

effectiveness of sales management• By salesman, product, region, customer


STEP 2: Staying Alive – Cash Collections and Revenue Forecasts in the CFF

• Call all customers who are delinquent the first day they

become delinquent

• KEEP NOTES AND KEEP CALLING

• I have a collection of 28 excuses from “we have the wrong

email address” to “’insert name here’ has left the company

and we’re just figuring out what she did”. Some are

legitimate, some are our fault.

• Without making the phone call you’ll never know why the

customer isn’t paying.


STEP 2. Revenue Management –Bi-product of the Cash Flow Forecast

• Forecasting by customer shows salesman’s effectiveness and acts as the salesmen’s MBO.

• Ties to production or staffing needs • Provides early warning of trends• The more accurate you are the more the bank will lend. • A survey by PwC has shown that the simple act of writing

down a plan or strategy – even if it is wrong – leads to better results. (www.strategyand.pwc.com).


http://www.strategyand.pwc.com/

Step 2 – Why Eliminating Bad Debts Is a

Better Priority Than Increasing Sales

• Example company (typical underperforming company data)

• Revenue $40 million. Bad Debt Write-offs - 1% - $400k

• Profit Margin 10%

• If A/R Manager eliminates bad debts, profit increases by $400k.

• To have same impact from increased sales, sales need to

increase by 10% ($4 million). The increased profit from this is

$400k – the 10% profit margin on the increased $4 million of

sales.

• In the real world, an aggressive A/R manager can have A/R

resolved within 6 months, a new salesman is going to take 6

months just to develop some leads.


STEP 3: The Organization Chart Du JourHow do we Manage Human Resources Efficiently?• In most companies, Payroll is a company’s biggest expense.

Therefore, to be profitable, you MUST control it.• Need to know who does what and who reports to whom.• The Organization Chart Du Jour provides an immediate

overview of where human resources are deployed today.• Goal is to reduce non-performing headcount.


STEP 3: The Organization Chart Du Jour Macro factors

• “Du jour” implies that the org chart should change often. In the early stages of a turnaround, it may change daily.

• As new HR policies (see later) are implemented, that will cause staff to leave.

• If the company is family owned, there is a high likelihood that many family members are “retired in place”, because CEO would rather be liked than make tough decisions.


STEP 3: Organization Chart Du Jour What It Tells Us

• Where does “total payroll” go?• Who is paid how much?• Who reports to whom?• Do any “positions” seem to be unnecessary or duplicative• From your knowledge of best practices, do staffing numbers

indicate any particular areas of weakness? • What do these people do• WOULD YOU NOTICE IF THEY WERE GONE?


STEP 3: Organization Chart Du Jour

• One bad apple can affect an entire department, or even the entire company. A VP who is undermining corporate objectives and has a loyal following, needs to be eliminated.

• Leads to immediate accountability – accountability means metrics, measurement, responsibility

• Simple act of creating it may lead to people opposing it (because they can no longer hide). This gives you even more insight into who should go!


STEP 4: How to Reduce the Biggest Expense: Payroll

• Both absolute numbers and total cost:• Staff Interviews – MBWA• MBOs• Overtime Ban• Drug Free/DUI Policy


STEP 4.2 Numbers: Staff Interviews and MBWA• Personally interview as many staff as possible. • Attitude is far more critical than aptitude. • Everyone needs to be on board. Those who aren’t

must be encouraged to leave.


STEP 4.2 Numbers: Top Grading – Jack Welch GE• In “Straight From The Gut”, Welch tells his side of the

GE turnaround. • His key method of staff reduction was 20/70/10• Getting rid of underperformers makes high

performers perform even better.


Step 4.2 Cost: Staff Interviews and Examples found by Wandering Around (MBWA)

• You will observe working habits of the many by interviewing a few. Examples:– long smoke breaks behind the bike sheds– Clocking on at 6 but reading the paper til 7.– Going out for three hour runs – Being on site (and paid) for 9 – 10 hours when

work could be done in 5.


COST: WHY OVERTIME IS A PROBLEM

• It’s paid at time and a half!• Often represents 15% of payroll costs. • In most companies, payroll represents 50 – 70% of total expense. If

these two facts are present in your company, eliminating overtime by itself could lead to a margin increase of 10%.

• Companies typically “grow” out of control. They needed O/T to grow but never curbed it when growth stopped.

• Using O/T regularly reflects an inability to plan in advance, or lack of management discipline.

• O/T has “always” been used by staff as an “entitlement”


WHY IS OVERTIME A PROBLEM? EXAMPLE FROM A REAL CLIENT

• Hourly paid workers actually performed five hours of productive work in a

day (as that was all the workload required).

• Their time cards showed 10 hours, but paid for 11 – 8 hours at straight

time and 2 hours at time and a half.

• Thus payroll cost was twice as high as necessary (11 hrs paid vs 5 hrs

required = 2.2 times more than needed.

• CONCLUSION – Cut payroll expense by 55%. (1 - 5/11)*100.

• Accomplished by staff reduction of 37% after O/T ban implemented.

• Skill was how to make these changes without lawsuits from protected

classes of employees.


STEP 4.3 SHORT TERM CONSEQUENCES OF INTRODUCING AN OVERTIME BAN

• Some employees will be disgruntled as they see an immediate pay cut and may leave. But this helps accomplish staff reduction objectives. The good ones will be happy that the “make work” environment has gone.

• Many employees and their managers will say “it’s not possible”. These are usually those who should go. The good ones will find ways to “make it happen”

• If O/T is found to be really necessary, a blanket ban will force evaluation of customer profitability to determine if the overtime costs are being recouped at the marginal level. See example in “distribution company” later in slides in Step 10.


STEP 4.3 ADDITIONAL BENEFITS OF OVERTIME BAN, BESIDES LOWER WAGE BILL

• Workers comp premium reduction

• Other P+C insurances rated on total payroll are reduced

• Payroll and Medicare taxes reduced

• Energy consumption reduced

• If number of employees goes down (as opposed to just hours):

– Benefits costs are reduced

– Less need for space, assets, consumables expense,

• Higher morale – you come to get a job done, get it done, and go home.

• Less tiredness, greater safety

• Fewer sick days claimed

• Slackers aren’t rewarded, means higher performers can enjoy coming to

work, and now they perform better because they see they are not having

to shoulder the load of others. Virtuous circle.


STEP 4.4 INTRODUCE A DRUG FREE WORKPLACE POLICY

• Even with recreational marijuana, we (business owners) can still mandate a drug free workplace and fire people with marijuana in their system at time of testing.

• Provide 6 weeks notice of implementation (gives bad boys a chance to go clean)

• Require ALL employees to acknowledge random testing is OK.• Have zero tolerance.• Use third party administrator for testing – no exemptions for

executives. This usually involves randomly testing about 5% of the employees each month.

• 4.2% failure rate reported by Quest Diagnostics in May 2017 suggest 1 in 25 employees still use drugs.


EXTENSION OF DRUG FREE POLICY TO NO DUIs OR DISQUALIFIED DRIVERS

• There is a reason the FAA does not allow pilots with DUIs. They have demonstrated irresponsibility and are a risk to safe operations.

• Follow the FAA’s lead – they have done the research, add this policy to your HR manual.

• ACG Denver 2016 Winner – Weifeld Contracting – 100% safety record, did not allow DUIs among employees!

• Example from the oil patch: If you know you have a DUI on staff who causes an accident, you can be charged with “Negligent Entrustment” and do jail time and $10 million fines


Drug Free/DUI Policy Implementation – Macro Benefits

• Large numbers of least competent staff will resign – self selecting the bad apples

• Easiest way to reduce headcount without direct firings– Better than LIFO, longest serving, equally across

the board, highest compensated, first impressions– Doesn’t make you the bad guy for arbitrary

selection of individuals – it is “the system”– Avoids lawsuits – non-discriminatory


Drug Free Policy – Micro Benefits

• Accident rate will drop• Productivity will improve• Greater reliability and safety• Less absenteeism• Lower incidence of crime• Pleasanter work environment• Workers Comp and Liability Insurance rates will drop –

sometimes a much as 50%• Avoids massive “lose the company” risks


Research on Drug Free Work PlacesSupports Claims Of Huge Efficiency Gains

• Cost to Employers of Employees with a Diagnosed Chemical Dependency Problem• ‚ Alcoholism causes 500 million lost workdays each year. (6)• ‚ Alcoholics are expensive to businesses in several different ways:• < Workplace accident rates are two or three times higher than normal;• < Alcoholics are five times more likely to file a worker�s compensation claim; and• < Alcoholics are 2.5 times more likely to have absences of eight days or more. (5)• ‚ Employees diagnosed with a chemical dependency problem in a large manufacturing plant were found to have:• < Six times the number of absences;• < Higher incidence of injuries, hypertension, and mental disorders. (7)• References1. Hoffman, J.P.; Brittingham , A.; and Larison, C. (19 96). Drug use among U.S. workers: Prevalence and trends by occupation

and industry categories. Number DHH S Publ. No. (SM A) 96-30 89. Rockville, MD: SAMHSA, Office of Applied Studies.• 2. French, M.T.; Zarkin, G.A.; Hartwell, T.D.; and Bray, J.W. (1995). Prevalence and consequences of smoking,• alcohol use , and illicit drug use at five worksites. Public Health Rep . 110:593-599.• 3. Hoffman, J.P.; Larison , C.; and Sanderson, A . (1997) . An analysis of worker drug use and workplace policies and programs. Rockville,

MD , Substance Abuse and Mental Health Services Administration, Office of Applied Studies, A-2 Analytic Series.• 4. National Household Survey on Drug Abuse: Main Findings 1 991 (19 93). Sub stance Abuse and Mental Health• Services Administration , Rockville, M D.• 5. �Drug abuse in the workplace: An employer�s guide for prevention.� EAP Digest.• 6. Department of Labor. (1998). �Working partners for an alcohol- and d rug-free American workplace,� (http://www.dol.gov/dol/asp).• 7. Bross, M.H.; Pace, S.K.; and Cronin, I.H. (1992). Chemical dependence: Analysis of work absenteeism and• associated mental illness. Journal of Occupational Medicine 34(1):1 6-19.• 8. Greenberg, E.S.; and Grunberg, L. (1995). Work alienation and problem alcohol behavior. Journal of Health and• Social Behavior 36(1):83-102.• 9. Delaney, W.P. and Ames, G. (1995 ). Work team attitudes, drinking norms, and work place drinking. The Journal of Drug Issues

25(2):275-290.


STEP 4.5 Management By Objectives (MBO)• Setting individual job objectives provides accountability, and

ensures everyone knows what is expected• Identifies duplicate or unnecessary work.• Underperformers will resign rather than be found to be

wanting. (Example – Texas CFO)• Requires a CEO who will hold execs accountable.• Holds managers accountable, as well as their subordinates.


OTHER COSTS:STEP 5.1: Benefits – Health Plans

• Find a good benefits broker who can evaluate your options– Ensure you have a High Deductible option– Introduce narrow networks– Audit all claims– Audit all beneficiaries– Limit non-generic drugs– Limit pharmacy choice– Require high Co-Pay for doctor visits, zero Co-pay for annual check-up– Go out for bid annually, and be aware of market changes. Negotiate

renewal premiums from existing carrier.


STEP 5.2: Benefits – Administration of Fees

• Perform a monthly reconciliation of users vs. premiums paid.• A typical underperforming company may be paying premiums

for 2% more members than are currently on payroll – as HR forgets to notify third party administrators of leavers!

• Even when HR notifies TPA of leavers, TPAs are notoriously lax in taking the names off the fee invoices.


STEP 5.3: Benefits – Increase Paid Time Off –but wisely, and account for it.

• Adequate time off leads to increased productivity and profitability, better morale, better planning, and in finance, enables frauds to be found!

• Do not segregate into vacation, sick and personal. Merge into one PTO bank. This motivates the top performers who are never sick but see the underperformers who pretend to be sick to go skiing.

• Consider closing the company between Christmas and New Year – very little gets done then even if open.


STEP 6: Travel and Entertainment Policies“How To Do More With Less”

• It is NOT smart to introduce a blanket travel ban! It is smart to ensure that travel is conducted in the most cost efficient manner.

• Travel and Entertaining, done wisely, is a necessary and valuable expense, critical to the success of most businesses, especially with regard to gaining and keeping clients. Face time matters.

• Abuse of what can be claimed is rampant in most companies without controls, and at all levels. (example – CEO – jewelry, HNL hols)

• Failure to plan in advance in buying airfares costs the company 100% more than if staff think ahead.

• Lack of control enables these egregious behaviors to flourish• Reviewing T+E expenses identifies the big spenders who are often lax with

their controls of other company assets, including staff. Very interesting overview of where to start cutting staff is by reviewing T+E.


STEP 6 PRACTICAL T+E POLICIES

• T+E often amounts to 10% of a badly controlled company’s expenses

• Purpose of a T+E policy is NOT to reduce travel, but to accomplish the same or better results at less cost. Usually possible to reduce by 50%.

• Every trip should have a quantifiable goal associated with it. Examples –salesman: to gain customer signature. For conference attendee: to obtain one cost saving idea

• Plan ahead – Period. No-one should get on a plane without at least 7 days advance planning. No one should go to a conference without having purchased the early bird rate.

• There is never a serious sales prospect who needs to see you “today” or the sale is lost. If you doubt this, ask your salesman to front the ticket cost (to be reimbursed if a sale is completed) and see what his reaction is!


STEP 7 – UNDER THE RADARALL OTHER EXPENSES

• These are expenses which generally are individually less than 2% of costs, or infrequently purchased, but when added together, have a significant impact on profitability.

• If you can reduce TWO of them by 50% you might increase profit margins by 2% - which in many companies would by itself translate to a 20% profit increase.


STEP 7 - Risk Management Safety + Quality = Higher Performance + Lower CostsKEY AREA OF FOCUS FOR MANUFACTURING, ENERGY AND CONSTRUCTION COMPANIES AS IT IMPACTS VIRTUALLY EVERY OTHER ASPECT OF THE COMPANY IN TERMS OF CULTURE AND HOW THAT IMPACTS PROFITS•OSHA sets basic safety rules for a reason – but even then you can follow the letter of the law, but not the spirit, and people will still die•Breaking OSHA regs costs lots of money besides fines:

• time to do remedial training• frequent work site interruptions from inspection visits• raises w/c and other insurance premiums. • If significant violations (ratios – incidents per 1000 work hours) you may be

disqualified as a contractor/supplier.


STEP 7 - Risk Management Safety + Quality = Higher Performance + Lower Costs•Talk to Insurance Broker – what actions or inactions, policies or lack thereof, have been high cost areas in past? Fix them.•Ensure insurance carrier is aware of Drug Free, Safety policies. These will generate immediate reduction•Maximize all deductibles – up to $20k will see like for like reduction in premiums, and up to $50k will continue the savings at about a 50% level. Explain reason – same as HDHPs. •Eliminate comprehensive coverage on old vehicles.•Ensure Ins Co has all Fire Protection drawings!


Step 7 Risk ManagementWorkers Compensation Insurance

• Work with WC provider to enjoy all additional savings, such as “codifying a safety plan”.

• Example – WY 15% reduction for “approved safety policy” and $15k deductible, with $10k deposit.

• Additional discounts for DISA (Defense Information Systems Agency) compliance (drug testing).

• Each claim free year leads to a lower EMR (experience modifier rate). Anything below 1 is good. Can go as low as 0.5

• Have a detailed accident reporting policy in place and take employees who have minor incidents e.g. cuts and bruises to a “workplace health partner” and have OTC meds provided, rather than write a prescription.


STEP 7: Easy Expenses To ReduceProfessional Fees - Audit

• Unless a public company, perform audit after traditional “busy season” i.e.

after April 15 so fees can be at “off-peak” rates.

• Go out to bid! Mid-tier firms such as Hein, ACM, EKSH, BDO are half the

cost of a Big 4.

• Bundling tax and audit with one firm may not only reduce fees but make

life simpler as all the information needed by tax is held by audit.

• Prepare all schedules in house.

• Prepare drafts of AFS, especially the Statement of Cash Flows, because

you understand the business, they don’t

• Hold them to a fixed fee and fixed dates so they have an incentive to

complete the job in one go. Every time a job is put down and picked up

later, there is wasted time getting back up to speed.


STEP 8: Bank Accounts/Interest Expense• Make sure that your ABL and other high interest debt is paid

off from lower interest revolvers.• Constantly compare options, especially if you are doing a

turnaround and your credit quality is improving.• Provide your banker with everything they ask for in a timely

manner, meet your forecasts, and collect your receivables.


STEP 9: REDUCTION OF PURCHASING COSTS• Ensure all prompt payment discounts are being taken. Taking a 2% discount for

paying in 10 days creates a 36% per year ROI.– Example – buy $100k/wk, = $5.2 million per year. Accelerating payment from 30 days to 10

requires $285k of additional cash (30/365*$5.2 million). Savings = 2% of $5.2 million = $104k. ROI = 104/285 = 36%

• Look at inventory levels – are they too high (tieing up working capital) because of “bulk discounts” which don’t exist? (Example – bulk chem distributor)

• Are suppliers too cozy with purchasing manager? (Example – DP gift cards for high costs)

• Shared services are bad, period! No individual ownership or accountability. Wrong metrics used to justify them. Examples: MGH duplicate marketing invoices, sales tax ignorance, failure to provide UK info – which led to ultimate fraud as disclosed in FT.


STEP 10: Using Gross Margin Analysis to Improve Gross Margin. Uncover Fraud, Waste and Mistakes

WHAT IS GROSS MARGIN ANALYSIS?

• A comparison of one amount to another to create a ratio, and to see how this value changes over time.• Example 1: Profit margins – compare revenues to costs.• Example 2: Production waste – compare the amount of

materials scrapped to the amount of good production• Example 3: Absenteeism – compare number of days taken

by employees to total days paid


STEP 10: Using Gross Margin Analysis to Improve Gross Margin. Uncover Fraud, Waste and Mistakes

Case Study – Chemicals DistributionFACTS:•Company bought bulk liquid chemicals wholesale in thousands of

gallon tankers, and then on its premises, filled 10/40/55 gallon

drums for retail sale.

•Purchasing Manager claimed he had reduced purchasing costs.

•Sales Manager claimed he had increased selling prices.

•YET, even though analysis of per unit purchasing prices, and per

unit selling prices supported both Managers� claims, a historic

margin analysis showed a decline in gross profit margins from 45%

– 35% in 3 years. How could this be?


QUESTION 10 : Answers

• All of the managers� assertions were true concerning their individual pricing. Calculations were correct and consistent.

SO WHAT WAS GOING WRONG?• No flow meters used between bulk tanks and individual drums – thus

no reconciliations as to volume out of tank = volume into drums• No inventory taken on delivery truck in or out of company facility thus

no control of everything being accounted for on the truck• No reconciliations between bulk purchases and individual sales• No order management – either customer to company, or delivery

fulfilment• No accountability either at salesman or driver level• RESULT – Employees knew of these weaknesses and were �personally�

selling inventory for cash.


STEP 10 CHEMICALS DISTRIBUTION CASE STUDY CONTINUED – solution to employee fraud

• The employee who I caught selling was fired the next day. Word got around. Theft stopped.

• Flow meters were installed on the bulk chem tanks and reconciled to small drums.

• All delivery trucks were inventoried on dispatch and return to the yard.

• Sales invoices were generated at each delivery point in real time (Serveman Pro)


STEP 10 DISTRIBUTION CASE STUDY CONTINUED – led to customer profitability analysis

• 80/20 rule becomes 80% of profits on 20% of customers, 60% of profits on 60% of customers, and 40% of losses on bottom 20% of your customers

• Identify “the bottom 20%”.• Dallas distribution center was serving one customer in Wichita

Falls – 150 miles away.• Delivery costs were about $1/mile!• Needed minimum purchase of $800 just to cover delivery.

Average purchase was $380. How did we fix this?


STEP 10 CHEMICALS DISTRIBUTION CASE STUDY CONTINUED – solution to unprofitable customer


STEP 10: USING GROSS MARGIN ANALYSIS TO DISCOVER ERRORS

Case Study 2 – Water Purchases• Local Water District purchased water by the millions of gallons from a

major master distributor.• Sold water to 4,000 retail customers (houses, hotels, schools, businesses,

HOAs) by the hundreds of thousands of gallons per annum.• Historic margin analysis showed 2% �line loss� over 8 years (which is a

fairly good rate for water lines).• Master distributor replaced its perfectly good functioning turbine meters

with some untested new �magnetic� technology. The indicated line loss went to 17%.

• UNACCEPTABLE!• GMA data ensured local district received $1/2 million compensation from

master distributor, and replacement of malfunctioning �new�meters with the old technology.


STEP 11 – TRANSPORTATION COSTS –OPERATING EXPENSES

• Many �old� habits, such as �warming up a diesel engine� are no longer necessary.

• Fuel management card. Require odometer reading and calculate mpg, following up with variances from expectations – catches filling up of personal vehicles

• GPS tracking for location/speeding purposes.• At fault accidents lead to termination.• Create routes which minimize left turns (UPS policy).

http://bigthink.com/robby-berman/the-science-behind-why-ups-trucks-avoid-making-left-turns


http://bigthink.com/robby-berman/the-science-behind-why-ups-

STEP 12 – FREE MONEY FROM TAXES!• USE TAX ON PERSONAL PROPERTY:

– Perform a total fixed asset inventory to complete a correct annual personal property tax declaration. If you don’t disclose disposals, you’ll be paying taxes on non-existent 20 year old equipment with zero book value, but the tax man never writes them off!

• DELAWARE FRANCHISE TAX: – If you are incorporated in Delaware, know that the state offers two options to

calculate their Franchise Tax. The tax calculated by each method can vary 1,000 fold. You can guarantee that DE sends out an invoice for the more favorable one to them. It is up to you to submit the method which is more favorable to you.

• UNINCORPORATED AREAS’ SALES TAX: – If your point of receipt of taxable goods is in an unincorporated county close to a

city, especially if the postal address is a city, ensure your vendor is only charging county and state tax. Example – Arapahoe County vs. Littleton.


STEP 12 – FREE MONEY FROM TAXES!• FELON TAX CREDIT (“Workers Opportunity Tax Credit”):

– Identify employees who are felons, veterans, long term unemployed, or

various other classes found on IRS form 8850. If they are, you can get a tax

credit for a significant amount of their wages.

• ENTERPRISE ZONE TAX CREDIT:

– If you have operations in a rural area, or an inner city, you may already be in

an enterprise zone. If so, there are usually credits for hiring new employees or

putting assets on the lot.


STEP 13: Bonus! Turn-arounds in the International Arena

• Taxes are different – understand them to take advantage of them. Example – ATTC specific year-end date in France

• Fight for what is right. Example – six year NOL carryforwards in Germany

• Understand where “branches” can have value over “subsidiaries”. Example France/Germany restructuring.

• Cannot always rely on local professional service providers to advise you regarding staff terminations – loyalty to their nationality vs. your company frequently trumps. Examples: Belgian sales manager – no obligation to sell, , French A/R Manager stealing from company.


STEP 13: Bonus! International Opportunities Continued

• Customs and laws, especially personnel, are often different, but not insurmountable. E.g. works councils, employment contracts, cars, vacations from day 1, holidays and the days before.

• Find a country manager who is fluent in English and subscribes to the profit motive. It’s worth an extra $50k.

• Document Transfer Pricing Policy to ensure you have contemporaneous documentation i/a/w/ OECD regs. Example –German losses at time of worldwide losses – going all the way to Competent Authority.


CONCLUSIONS • Know where you are today• Know where you are going• Create a Plan• Prepare a map• Select the team• Plan your operations• Execute those operations• Compare the results to the plan• Eliminate inefficiencies• Continually improve.


CONCLUSION: SYNOPSIS OF THE 12-STEP PLAN RESULTS

TYPICAL ENGAGEMENT CONTROLLABLE• 13 week cash flow forecast Prepare and analyze at least once per week!• Receivables and cash collections Set a target of 42 days. Call to collect.

Set sales targets.• Organization Chart du jour Identify non-performers and eliminate.

Set MBOs• Payroll – O/T, drug free policy Ban overtime. Introduce Drug Free and DUI

policy. • Benefits Scrutinize costs, reconcile census, combine

PTO. • Travel and Entertainment Plan ahead. Require documentary evidence.



TYPICAL ENGAGEMENT CONTROLLABLE

• Professional fees and risk mgmt Self insure/high deductibles/bid/supervise. Introduce safety policies.

• Bank accounts Consolidate accounts and loans• Purchasing Obtain prompt discounts, question everything. • Gross margin analysis Reconciliations between in and out• Transportation costs Engines off, manage fuel, keep old vehicles• Property, sales and use tax, Unincorporated, tax exempt• International When in Rome..


TABLE DISCUSSION

• PICK ONE OF THESE STRATEGIES WHICH YOU THINK WILL BE THE MOST EFFECTIVE AT INCREASING THE PROFITABILITY OF YOUR (or your client’s) COMPANY. WHY WILL IT BE THE MOST EFFECTIVE AND WHAT ARE THE CHALLENGES IN INTRODUCING IT?



• AND WHAT WILL BE THE OUTCOME OF ALL THESE CHANGES?


Summary ResultsAll numbers in $thousands

Car wash Chemicals Transport Consulting

REVENUES $40M $10M $36M $10M

Receivables 400 50 250 600

Staff Reduction 500 920 5000 2500

Overtime ban 225 100 1125

Benefits change/admin 192 200 200

Insurance 50 10 100 20

T+E 720

Vehicles 108 80 300

Prof fees 230 170

Purchasing/pilfering 400 400 100

Interest 56 80

Rent/tax 100 500

TURN-AROUND $2.261M $1.56M $7.055M $4.81M


Summary ResultsAll numbers in $thousands

Software Info services Billing Oilfield Services

REVENUES $30M $60M $12M $40M

Receivables 400 500 250 0

Staff Reduction 120 60 4000 0

Overtime ban/per diem 1700

Benefits change/admin 100

Insurance 200 50 200

T+E 120 2400

Vehicles

Prof fees 100 20

Purchasing/pilfering 360 300

Interest 90 50

Rent/tax 3000 500 250

TURN-AROUND $4.03M $3.82M $4.35M $2.57M


CONCLUSIONS• Underperforming companies all suffer from the same macro

problem – LACK OF CONTROL.

• The 12-Step plan template can be used for all.

• CFF shows you where money comes from and goes to.

• Staff can be reduced by self selection.

• Implement controls over visible activities – overtime, debt collection, T+E, vehicles, and the rest will follow.

• Plan, follow up, and adjust.

LEADS TO SUCCESSFUL LANDING!


Philip G Varley, FCA, MBA, CPAThe Barrington Group Inc1 Mountain Cedar LaneLittleton, CO 80127303 946 [email protected]


Contact Information

Philip G Varley, FCA, MBA, CPAThe Barrington Group Inc1 Mountain Cedar LaneLittleton, CO 80127303 946 [email protected]


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