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KEYS TO PROFITABILITY

KEYS TO PROFITABILITY. FPPA MANAGEMENT WORKSHOP CHICAGO IL SEPTEMBER 11, 2007. Introduction . MAXIMIZING PROFITS KEY CONCEPTS TEN STEPS TOWARDS PROFITABILITY MAXIMIZING ENTERPRISE VALUE. MAXIMIZING PROFITABILITY. VISION INNOVATION PASSION ATTENTION TO DETAIL RECOGNIZING TALENT

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KEYS TO PROFITABILITY

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  1. KEYS TO PROFITABILITY FPPA MANAGEMENT WORKSHOP CHICAGO IL SEPTEMBER 11, 2007 M.S. Ackerman & Co. LLP

  2. Introduction • MAXIMIZING PROFITS • KEY CONCEPTS • TEN STEPS TOWARDS PROFITABILITY • MAXIMIZING ENTERPRISE VALUE M.S. Ackerman & Co. LLP

  3. MAXIMIZING PROFITABILITY • VISION • INNOVATION • PASSION • ATTENTION TO DETAIL • RECOGNIZING TALENT • UNDERSTANDING YOUR LIMITATIONS • TAKING CALCULATED RISKS • SHORT MEDIUM AND LONG RANGE PLANNING • CUSTOMER ORIENTATION • OUTSIDE “ADVISORY” BOARD • PAID CONSULTANTS • TEN STEPS TOWARD PROFITABILITY M.S. Ackerman & Co. LLP

  4. M.S. Ackerman & Co. LLP

  5. WORK YOUR NICHE • SWOT ANALYSIS • ACCENTUATE THE POSITIVE • MINIMIZE THE NEGATIVE • BE AGGRESSIVE WHERE YOU HAVE THE ADVANTAGE • VALUE ADDED SUPPLIER • FORGE STRATEGIC ALLIANCES WITH “FRIENDLY COMPETITORS” TO LEVERAGE OFF OF THEIR NICHE M.S. Ackerman & Co. LLP

  6. SELF HELP EXERCISE #1 • WRITE DOWN TWO THINGS THAT YOUR COMPANY DOES WELL AND TWO THINGS THAT IT DOES POORLY • DEVISE A STRATEGY TO SELL/MARKET THE TWO THINGS YOU DO WELL • COME UP WITH A PLAN TO IMPROVE OR ELIMINATE THE TWO THINGS YOU DO POORLY M.S. Ackerman & Co. LLP

  7. HIRE MANAGERS WITH PASSION • MANAGEMENT, MANAGEMENT, MANAGEMENT!!! • ONLY NATURAL LEADERS NEED APPLY • SHOW THEM THAT YOU CARE • LET YOUR PASSION BE CONTAGEOUS • EMPOWER THEM TO MAKE DECISIONS • HAVE REGULAR MEETINGS TO DISCUSS AND EVALUATE • INSTALL FORMALIZED PERFORMANCE MEASUREMENT SYSTEMS • COMMUNICATION IS THE KEY TO SUCCESS! M.S. Ackerman & Co. LLP

  8. SELF HELP EXERCISE #2 • PICK A MACHINE CENTER OR PROCESS THAT IS NOT PERFORMING UP TO EXPECTED EFFICIENCY • GET A FLIP CHART AND WRITE DOWN THE EXPECTED PERFORMANCE RIGHT AT THAT AREA • HAVE A MANAGER (OR THE WORKERS THEMSELVES) GRAPH THEIR PROGRESS OR LACK THEREOF ON A DAILY BASIS M.S. Ackerman & Co. LLP

  9. KNOW YOUR COSTS • KNOWING OVERALL AVERAGE COSTS ARE FAR LESS IMPORTANT THAN UNDERSTANDING THE INCREMENTAL COST OF A NEW ORDER • FOCUS ON CONTRIBUTION WHICH IS DEFINED AS SALES PRICE LESS VARIABLE COSTS • LOOK AT SIGNIFICANT JOB COST VARIANCES REGULARLY M.S. Ackerman & Co. LLP

  10. SELF HELP EXERCISE #3 • REVIEW THE FIVE JOBS THAT RAN THROUGH YOUR PLANT RECENTLY WITH THE LARGEST VARIANCES FROM THE ESTIMATE • STUDY THE METHODOLOGY USED IN THE ESTIMATE AND REVIEW THE PRICING DECISION • GOOD DECISION, BAD PRODUCTION? • BAD ESTIMATE? • WRONG KIND OF BUSINESS? • MAKE SURE THAT THE SALESMAN THE ESTIMATOR AND OTHER KEY PERSONNEL ARE INVOLVED IN THE MEETING M.S. Ackerman & Co. LLP

  11. LEAN MANUFACTURING • REDUCES CYCLE TIMES – INCREASES CAPACITY • REDUCE WASTE • ADD MORE VOLUME TO EXISTING OVERHEAD • LABOR AND OVERHEAD ARE A SMALLER PERCENTAGE OF SALES • CAN YOU FILL UP NEW CAPACITY? • WHAT IF YOU CAN’T? M.S. Ackerman & Co. LLP

  12. Historical Income Statement

  13. Historical Income Statement • Bottom Line Scorecard • Sales – COGS = Gross Profit • Fixed and variable overhead lumped together • Lines of business noit segregated • Gross Profit – Operating Expenses = Operating Income • Operating Income – Other income and expense – Provision for taxes = net income M.S. Ackerman & Co. LLP

  14. Current Income Statement

  15. Current reporting model • Defines contribution broadly • All direct labor is variable • Most other plant costs are considered variable other then rent, depreciation, insurance and other big ticket items • Often will separate out lines of business • Putting the p and l in estimating system format will facilitate reconciliation M.S. Ackerman & Co. LLP

  16. Current Reporting Model • Based upon the notion that Cost plus provision for profit = sales price • Full absorption costing – the basic costing model that has been used by most manufacturers for quite some time. • ensures that all costs will be taken into account in pricing decisions to insure the company is profitable • causes elaborate cost allocations to be made, whether or not they really make sense M.S. Ackerman & Co. LLP

  17. Current Reporting Model • Full absorption costing (cont.) • Always uses a planned level of activity • Therefore unless the company exactly hits the desired level of activity there will always be volume variances – ie. the costs will be “over-absorbed” or “under-absorbed” • The pitfalls of full absorption costing • Efficiencies - Your cost structure is to a large extent a function of your efficiencies. If you are inefficient, then your costing system will attempt to pass that on to your customers by suggesting that you charge higher prices then you’re more efficient competitors can. M.S. Ackerman & Co. LLP

  18. Current Reporting Model • The pitfalls of full absorption costing (cont.) • Recouping capital expenditures – The Japanese caused a major uproar back in the seventies when they decided to look at there capital costs over a very long period of time. Their resulting view of the long-term average cost of building plants and installing equipment allowed them to charge less currently then their western competitors, who wanted to recoup these costs over a much shorter period of time. • Volume variances – No matter what methodology is being used, all costing system will attempt to allocate the unallocateable by applying it ratably over a planned level of activity. When the activity levels are higher or lower then planned they end up with something called a volume variance. Positive volume variance means that they recouped more then their actual costs and negative volume variances mean that they didn’t recoup enough of them. Is this any way to run a business? M.S. Ackerman & Co. LLP

  19. Current Reporting Model • The pitfalls of full absorption costing (cont.) • Allocating the “un-allocatable” – Many costs simply cannot be allocated in a sensible manner. Let’s look at customer service costs as an example. Certainly there is a cost associated with taking an order and almost every manufacturer devotes a lot of money to the overall customer service area. Some orders are complex and require a lot of time from a lot of different people and others are simple releases from inventory. How does one allocate this cost back to an order? How does one allocate most overhead costs back to an order? The answer invariably is “badly”!!! If, for example, square footage is considered the most objective method of allocation, then every square foot shipped will contain an allocation of these overhead items. There are many other possible bases on which to allocate these costs and different pools of costs can be allocated using different factors. This is what creates much of the complexity. Most manufacturers don’t have a very good understanding of what costs are being allocated and what methods are being used to make the allocations. I came across a manufacturer whose system allocated all costs based upon footage, so when he got a “labor only job”, the system didn’t allocate anything. This was an extreme and obvious case and even he knew that there was something wrong with the system, but how many other pricing decisions are made based upon dangerously incorrect and often arbitrary cost allocations? M.S. Ackerman & Co. LLP

  20. Current Reporting Model • The pitfalls of full absorption costing (cont.) • Defining investment – Many costs that are being charged to the current year income statement really represent investments in the future. Examples of this are costs associated with building a design department or fulfillment operation or developing new salespeople. They certainly don’t rise to the classic definition of “research and development” and they aren’t investments in tangible assets, but they will (hopefully) benefit future periods. The question that you must ask is, is it reasonable to attempt to recoup these costs directly through increased current prices? M.S. Ackerman & Co. LLP

  21. ALLOCATION METHODS • Charged directly to the product, for example: • Paper is estimated at a cost per MSF based upon the board grade, quantity and the prices and waste factors entered into the system. Most material costs are recaptured in this way. • Some other costs can be recaptured similarly. Material handling can be charged per MSF regardless of machine center or it can be charged to machine centers. • Delivery is often charged to the product by a combination of miles and MSF. • Warehousing is often charged to the product by a combination of number of releases, number of months and MSF • Charged directly to the order, for example: • Some companies identify order related costs, such as customer service and charge a flat amount per order • Charged to a cost center. Most manufacturing costs are charged to a cost center, then the total machine hours are estimated and a machine hour rate is created. The system then estimates the time that is necessary to set up and run the order. This time multiplied by the rate results in the cost that is charged to the order. M.S. Ackerman & Co. LLP

  22. THE ART OF PRICING • ALWAYS PRICE TO AN INDEX OF 100 OR AN ROS OF 10!!!!!! • IF YOU CAN GET AWAY WITH THAT THEN DO IT!!!!! • IF YOU CAN’T THEN……. • AFTER CALCULATING WHAT YOUR OWN “TRUE COSTS” ARE USING FULL ABSORPTION COSTING • IMAGINE THAT YOU WERE THE MOST EFFICIENT BUYER OF RAW MATERIALS, HAD THE BEST PLANT LAYOUT AND THE MOST EFFICIENT LABOR COSTS AND THE BEST EQUIPMENT FOR THE JOB IN YOUR MARKET PLACE AND THEN RE-PRICE THE WORK. • LOOK AT THE INTANGIBLES OF THE SITUATION M.S. Ackerman & Co. LLP

  23. THE ART OF PRICING • IF YOU CAN’T THEN……. • LOOK AT THE INTANGIBLES OF THE SITUATION • MAKE A DECISION SOMEWHERE BETWEEN THE TWO FIGURES AND PAY CLOSE ATTENTION TO THE CONTRIBUTION COLLARS BEING GENERATED • AFTER ALL THE BOTTOM LINE IN MANUFACTURING, NO MATTER HOW YOU VIEW THE WORLD IS TO GENERATE ENOUGH CONTRIBUTION DOLLARS TO COVER YOUR FIXED COSTS!!!!!!! M.S. Ackerman & Co. LLP

  24. FUTURE REPORTING MODEL • WORLD CLASS (LEAN) MANUFACTURING THEORY STARTS FROM THE PREMISE THAT SINCE THE “MARKET” SETS THE PRICE, ALL THE MANUFACTURER CAN DO IS DECREASE COSTS • iT IS THEREFORE BASED UPON THE FOLLOWING FORMULA • SALES PRICE LESS COST = PROFIT M.S. Ackerman & Co. LLP

  25. LEAN MANUFACTURING • PRODUCTIVE CAPACITY IS INCREASED BY 50 – 100% • LABOR AND OVERHEAD ARE A MUCH LOWER PERCENTAGE OF SALES THEN THEY WERE PREVIOUSLY, SO IT DOESN’T PAY TO SPEND A LOT OF RESOURCES ALLOCATING THEM TO EACH ORDER • THE KEYS TO SUCCESS LIE MORE WITH PERFORMANCE MEASUREMENT AND PROCESS IMPROVEMENT M.S. Ackerman & Co. LLP

  26. LEAN COSTING • FOCUS ON CONTRIBUTION DOLLARS (WITH CONTRIBUTION BEING DEFINED AS THE INCREMENTAL COST OF THE ORDER) M.S. Ackerman & Co. LLP

  27. LEAN PRICING • NOT MUCH TO DO HERE BUT MAKE SURE THAT SUFFICIENT CONTRIBUTION DOLLARS ARE GENERATED AND THAT THERE IS AVAILABLE TIME AT THE MACHINE CENTER (S) M.S. Ackerman & Co. LLP

  28. DEAL FROM STRENGTH • IF A VENDOR OR CUSTOMER OR EMPLOYEE SENSES WEAKNESS YOU WILL NOT GET THE BEST DEAL POSSIBLE • DON’T TAKE ON ORDERS JUST TO “COVER OVERHEAD” – PRICE CUTTING IS THE ULTIMATE MANIFESTATION OF DEALING FROM WEAKNESS • DON’T OVERPAY EMPLOYEES BECAUSE YOUR AFRAID THEY’LL LEAVE • GAMESMENSHIP AND A GOOD POKER FACE! M.S. Ackerman & Co. LLP

  29. SELF HELP EXERCISE #4 • REVIEW YOUR FIVE LEAST PROFITABLE CUSTOMERS AND COME UP WITH WAYS OF INCREASING PRICES OR ELIMINATING THEM • IF YOUR ANSWER IS THAT YOU JUST CAN’T SURVIVE WITHOUT THEM GO BACK TO REASON NUMBER ONE AND WORK A LITTLE HARDER AT IT • REVIEW ALL OF YOUR EXPENSES AND DETERMINE WHICH ONES ARE TRULY VARIABLE • REORGANIZE YOUR P AND L BASED UPON FIXED VERSUS VARIABLE COSTS AND DETERMINE WHAT CONTRIBUTION IS • TRACK THE CONTRIBUTION FROM EACH ORDER FOR A MONTH AND RECONCILE THE ACTUAL CONTRIBUTION FROM THE ESTIMATED CONTRIBUTION AND SEE HOW BIG A DIFFERENCE THERE IS • DIVIDE THE FIXED COSTS BY THE NUMBER OF DAYS IN THE PERIOD TO SEE HOW MUCH CONTRIBUTION YOU NEED TO BOOK EACH DAY TO BREAK EVEN M.S. Ackerman & Co. LLP

  30. DON’T CODDLE YOUR SALESPEOPLE • ANOTHER PRIME EXAMPLE OF DEALING FROM WEAKNESS, BUT VERY PERVASIVE • SALESPEOPLE ARE HUNTERS AND MOST OF ALL WANT GOOD “HUNTING TOOLS” • GIVE THEM NEW INNOVATIVE NON-TRADITIONAL PRODUCTS AND SERVICES • INCENTIVIZE THEM TO SELL WHAT IS MOST PROFITABLE FOR YOU • GIVE THEM SOMETHING EXTRA FOR NEW ACCOUNTS • DON’T LIVE IN FEAR OF THEM! M.S. Ackerman & Co. LLP

  31. SELF HELP EXERCISE #5 • RANK YOUR SALES FORCE BASED UPON CONTRIBUTION • PICK THE TWO WORST PERFORMERS AND WORK WITH THEM TO IMPROVE • CONSIDER SWITCHING EVERYONE TO A COMMISSION BASED MORE ON CONTRIBUTION THAN SALES M.S. Ackerman & Co. LLP

  32. INITIATE WASTE CONTROL • MATERIALS ARE THE BIGGEST COST IN YOUR P AND L, BUT DEFINE WASTE BROADLY • TOO MUCH WASTE CAN BE FATAL • CUTTING DOWN ON WASTE WILL DRAMATICALLY INCREASE PROFITS • RAISING EVERYONES CONSCIOUSNESS AND ALLOCATING RESOURCES TO WASTE CONTROL IS THE FIRST STEP • DON’T ALLOW MISTAKES TO “SNEAK THROUGH” – CULTURE CHANGE!! • MOST PROFITABLE COMPANIES HAVE FORMAL WASTE CONTROL PROGRAMS M.S. Ackerman & Co. LLP

  33. SELF HELP EXERCISE #6 • BUY A BOOK ON LEAN OR “WORLD CLASS” MANUFACTURING • CONSIDER HIRING A CONSULTANT TO DO AN INITIAL SURVEY • THERE IS WASTE AND INEFFICIENCY IN EVERY OPERATION FROM SALES SERVICE TO PRODUCTION TO DELIVERY • ULTIMATE TANGIBLE BENEFITS ARE LESS WASTE, INCREASED CAPACITY, SHORTER CYCLE TIMES FROM ORDER TO DELIVERY • INTANGIBLE BENEFITS INCLUDE HAPPIER CUSTOMERS, EMPLOYEES AND SUPPLIERS M.S. Ackerman & Co. LLP

  34. MOTIVATE EMPLOYEES • PEOPLE ARE YOUR MOST VALUABLE ASSET • ATTRACTING AND MAINTAINING GOOD PEOPLE IS DIFFICULT THE KEYS ARE • LISTENING TO THEM • EMPOWERING THEM • MAKE THEM FEEL THAT THEY CAN CONTRIBUTE • MEASURE PERFORMANCE CONSISTENTLY AND OBJECTIVELY • REALISTIC INCENTIVE COMPENSATION PROGRAMS • CONSIDER “GOLDEN HANDCUFF” ARRANGEMENTS M.S. Ackerman & Co. LLP

  35. SELF HELP EXERCISE #7 • THINK OF TWO INSTANCES WHERE YOU MAKE ALL OF THE DECISIONS THAT YOU SHOULD BE ABLE TO DELEGATE • PICK OUT THE PEOPLE WHO YOU THINK CAN HANDLE IT AND BEGIN TRAINING THEM IMMEDIATELY • MONITOR THEM CLOSELY, BUT EXPECT MISTAKES – THAT’S THE ONLY WAY THAT THEY WILL LEARN • FOR EACH CATEGORY OF EMPLOYEE COME UP WITH 2 OR THREE KEY PERFORMANCE INDICATORS AND MEASURE THEM DAILY FOR A FEW MONTHS. • MAKE SURE TO GIVE THE EMPLOYEES THE DATA • GET THEM INVOLVED IN TRACKING IT • MEET WITH THEM ON A REGULAR BASIS TO DISCUSS THE RESULTS • CONSIDER SOME SORT OF MONETARY OR NON-MONETARY SYSTEM OF REWARDS BASED UPON THE RESULTS M.S. Ackerman & Co. LLP

  36. FORGE VENDOR RELATIONSHIPS • JUST LIKE YOU WANT TO FORGE “PARTNERSHIPS” WITH YOU CUSTOMERS, YOUR VENDORS WISH TO DO THE SAME WITH YOU • YOU NEED ALL THE FRIENDS YOU CAN GET WHEN TIMES ARE TOUGH • IS PRICE ALWAYS THE KEY? • WHAT ABOUT QUALITY? • WHAT ABOUT ON-TIME DELIVERY? • SHOW A LITTLE LOYALTY AND IT WILL PAY OFF “IN SPADES” M.S. Ackerman & Co. LLP

  37. SELF HELP EXERCISE #8 • REVIEW YOUR VENDOR LIST AND PICK OUT TWO VENDORS THAT YOU DON’T HAVE A PERSONAL RELATIONSHIP WITH • PICK UP THE PHONE AND ARRANGE A MEETING • WHO KNOWS WHAT OPPORTUNITIES YOU AND YOUR NEW FRIEND MAY FIND! M.S. Ackerman & Co. LLP

  38. BE A BOOSTER • THERE ARE DISTINCT ADVANTAGES TO BEING VIEWED AS THE “HOME TEAM” • RECRUITING EMPLOYEES, GETTING BUSINESS FROM OTHER “LOCALS”, GETTING ZONE CHANGES, ETC. • BE A GOOD NEIGHBOR • JOIN LOCAL GROUPS AND “RUB ELBOWS” WITH LOCAL “BIG SHOTS” M.S. Ackerman & Co. LLP

  39. SELF HELP EXERCISE #9 • SOLICIT OPINIONS FOR A LOCAL CAUSE FOR YOUR COMPANY TO GET BEHIND • SOMETHING THAT BENEFITS NEEDY PEOPLE OR GIVES THE COMMUNITY A SENSE OF PRIDE • PLAN TO GET ALL OF YOUR PEOPLE INVOLVED AND BE GENEROUS M.S. Ackerman & Co. LLP

  40. BE CAREFUL WITH CAPITAL • GET OVER THE START-UP CULTURE OF WORKING ON A SHOE STRING BUDGET • DON’T WITHDRAW TOO MUCH CAPITAL TO FUND YOUR LIFESTYLE • YOU DON’T ALWAYS HAVE TO HAVE THE LATEST AND GREATES INNOVATION • LEVERAGE CAN BE A GOOD THING,BUT TOO MUCH LEVERAGE CAN KILL • BORROWING TO FUND EXPANSION IS NEEDED, BUT BORROWING TO FUND DAY TO DAY OPERATIONS OR DISTRIBUTIONS CAN BE PROBLEMATIC M.S. Ackerman & Co. LLP

  41. SELF HELP EXERCISE #10 • LOOK AT YOUR BALANCE SHEET FOR THE CURRENT MONTH AND THE LAST THREE YEAR ENDS • DIVIDE TOTAL LIABILITIES BY TOTAL EQUITY. • THIS IS YOUR OVERALL LEVERAGE OR DEBT TO EQUITY RATIO • IS IT GETTING BIGGER OR SMALLER? • IS IT GREATER THAN 3:1 • A LARGE AND CONTINUALLY GROWING NUMBER SHOWS A COMPANY THAT IS AT RISK OF FAILING M.S. Ackerman & Co. LLP

  42. RECOMMENDATIONS • TAKE A HARD LOOK AT YOUR STRENGTHS AND WEAKNESSES • ALWAYS BE ON THE LOOKOUT FOR OPPORTUNITIES AND THREATS • HIRE GOOD PEOPLE, INCENTIVIZE THEM AND MEASURE THEIR PROGRESS CONSISTENTLY AND OBJECTIVELY • CONSIDER REGULAR OFF-SITE RETREATS WITH KEY PEOPLE AND LISTEN TO WHAT THEY HAVE TO SAY • HAVE A SHORT MEDIUM AND LONG RUN PLAN • COMMUNICATE KEY COMPANY OBJECTIVES TO EVERYONE M.S. Ackerman & Co. LLP

  43. CHANGES IN THE BANKRUPTCY SYSTEM FPPA MANAGEMENT WORKSHOP M.S. Ackerman & Co. LLP

  44. PREFERENCE ACTIONS • FOR PAYMENTS MADE WITHIN 90 DAYS OF FILING • UP TO ONE YEAR FOR INSIDERS • DEFENSES • CONTEMPORANEOUS EXCHANGE FOR VALUE (COD,CIA) • New value given after transfer • Payment was made in the ordinary course of business • Either transfer was ordinary between the debtor and creditor, OR the transfer was made according to normal business terms. • No preference actions when aggregate claim is less than $5,000 • Must file in Federal District Court where the creditor resides if the aggregate claim is within $5,000 - $10,000 M.S. Ackerman & Co. LLP

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