VistaVu Blog
It’s not how much we sell that matters, it’s how much we keep
I recently attended a presentation by KPMG on mergers and acquisitions. (They did a great job, and since then they have agreed to present to our customers and prospective customers on this very same topic July 8th, 2010 – you should sign up if you have not already done so – email leldred@vistavusolutions.com).
As every purchase price was a calculation of EBITDA, I was reminded on the importance of predictable and growing earnings to maximize your sales value. Which got me thinking, it’s not how much we sell that matters to a potential purchaser, it’s how much we keep.
I have two colleagues that run their own businesses. I am very familiar with the owners and the inner workings of each company.
One business is ten times the size of the other company in revenues but only a 1/10th as profitable. Many things separate these two organizations. One is a manufacturer; the other a services firm. However, both are very people- intensive businesses and rely heavily on them to generate revenue. As such, their relative performance could be chalked up to the economy being more favorable to one type of business than the other.
But, in my view of their situation it all comes down to management (specifically management style and the tools by which they manage).
The colleague who is ten times more profitable is meticulous about planning, about cost control, and about operational efficiency. He tracks Key Performance Indicators (KPI), both financial and managerial, and spends his time reviewing and tweaking them to find ways to generate more revenue from the same monthly expenses.
The other colleague is enthusiastic about growth and sales. He spends less time on financial performance, cost control and operational efficiencies, and more time on daily operations and sales activities. He does not measure the return on his investments or the profitability of the work he takes on.
Both have sales teams, both have operation and financial management, but what each prioritizes is very different and the results speak for themselves.
I saw the same results with a distribution company. The company had bought and implemented SAP and had requested me to come in and assess the effectiveness of their use of this system.
SAP like any ERP system is a large investment and to the owner’s credit they wanted to maximize their investment. After a review of their SAP system, I quickly noticed that none of the financial controls within their system were being utilized. No budgets, no alerts, no approval procedures, no management reporting.
Nothing.
The results again spoke for themselves; on $15M in sales they had a profit of $50,000.
In both cases of high growth and low profit, the owners knew their business, had many happy clients, had satisfied staff, and generated strong sales.
They’re good managers.
The good news is that this high sales; low profit scenario for both companies can be fixed relatively easily.
As the owners/CEOs of these high sales; low profit businesses to keep more of what they sell, they need to reprioritize the importance of the numbers within their responsibilities.
If it is not a high priority or an area of competency for them, then it is necessary that they employ someone who has the expertise and equip them with the necessary tools to manage the numbers.
Key management tools must include the ability to manage budgets, alert to deviations from work flow, deliver real time job/project costing, enforce approval procedures, and not only provide strong financial reporting, but also strong managerial reporting in the form of KPIs.
With predictable, growing profits, when the day comes to sell, they will absolutely maximize their return.
VistaVu Blog
Better Reporting/Cost Control
With a current state of the US economy, SAP has seen an increase in the two tools being purchased and used at the enterprise level. The first is budgeting software tools, companies who have not historically worried about budgeting have now started to build budgets in an attempt to track costs and create financial controls. The second is reporting tools such as Business Objects which will provide timely and relevant managerial reporting.
Many of you have been using SAP to a point where you have great familiarity with the daily operational flow of the product.
Now is the time to take further advantage of the tool you own by implementing one or more financial controls including:
1) Approval procedures
Approval procedures allow you to ensure that purchases and sales gain management approval. You can place in thresholds whereby anything over a certain dollar amount require approval anything below does not. As an owner/manager this will help you control costs, reduce discounts and guard cash.
2) Alerts
Alerts support the SAP methodology of “management by exception”. Based on the premise that if everything is occurring at an acceptable level of performance then it is business as normal otherwise an Alert will notify you of deviations. Examples of Alerts include notification when items ordered were not delivered on the date expected or when certifications for your staff come due.
3) Budgeting
The SAP Business One budgeting notifies you of budget overages and can be configured to block transactions which exceed budget levels.
4) Purchase Order process
Using the Purchase Order process you can ensure that purchases are approved, costs are monitored and inventory is accounted for. In the purchase order process you can use short cuts like the last prices report to know what you paid last time and who you purchased from or the item by warehouse to know if you have this item in another location within your company.
Or use one of the several reporting tools already created (Drag and Relate, Query Wizard, XL Reporter, Crystal Reports)
Drag and Relate is a patented process only available in SAP Business One. This reporting tool allows you to quickly and easily see all the activity of your customer at a glance.
The query wizard is your ability to gain quick answers to immediate questions, generate quick reports or set up Alerts that will notify you when someone deviates from your business flow.
XL Reporter this is an Excel based reporting tool. Quickly and easily you can create reports, build graphs and dynamically update your information as your transactions updates.
Finally, with the acquisition of Business Objects, SAP acquired Crystal Reports. All SAP Business One customers have included in their purchase of SAP Business One a single license of Crystal Reports. This tool is one of the most popular reporting tools in the world appearing in many software products beyond SAP. To use this tool you will need to be more advanced in your understanding of databases, and table structure. But once you have mastered this program – your reporting capabilities are limitless.
In closing, given the state of the nation and the uncertainty of the markets, now is the time to begin bringing in stronger financial controls and gaining greater efficiency through your organization. The tools are there – you’ve paid for them – we look forward to helping you leverage your investment.
Jory