Managing Cash FlowAn Operational Focus phần 6 potx

ABC Costs Integrated with Operating Efficiencies and Cost Reductions Through analysis of operations and processes, the following activities could be eliminated: • Storeroom • Staging • Moves In addition, through effective repurchase negotiations material costs could be reduced to $26.00 per unit and 100 pieces placed into production to produce 100 items. Direct labor times could also be reduced as follows: • Setups: 3 @ 4 hours each • Processing time: 108.8 hours per lot • Quality control: 2 hours per lot • Supervision: 1 hour per lot Task: Recalculate ABC costs based on the preceding data. Total Cost Unit Cost Materials $2,600.00 $ 26.00 Direct labor Setups 144.00 1.44 Processing 1,305.60 13.06 _________ ______ Total 1,449.60 14.50 ABC costs: Quality control 32.00 0.32 Packing/shipping 64.00 0.64 Supplies 480.00 4.80 Supervision 16.00 0.16 Other costs 840.00 8.40 _________ ______ Total ABC Costs 1,432.00 14.32 _________ ______ Total Cost $ 5,481.60 $ 54.82 _________ ______ _________ ______ What selling price should be recommended at this cost? Activity Based Costing Principles 173 ABC Costs with Identification of Specific Elements of Other Activity Costs Further analysis identified specific elements of other activity costs of $840.00 to be as follows: Output Per OM Total Unit Measure Unit Cost Cost Cost Bill of material Hours 2.0 $30.00 $ 60.00 $0.60 Routing/Process Hours 1.5 20.00 30.00 0.30 Purchasing POs 4 75.00 300.00 3.00 Receiving Number 4 12.00 48.00 0.48 Storeroom moves Number 2 18.00 36.00 0.36 Work–in-process moves Number 6 12.00 72.00 0.72 Inspections Number 3 25.00 75.00 0.75 Packaging Unit 1 18.00 18.00 0.18 Shipping Unit 1 13.00 13.00 0.13 Accounts payable Number 4 32.00 128.00 1.28 _______ ______ Total Activity Costs $780.00 $7.80 Allocated Costs 60.00 0.60 _______ ______ Total Cost $840.00 $8.40 _______ ______ _______ ______ What activities should be considered for further analysis leading toward fur- ther cost reductions? Remember that a dollar of savings from any source produces a dollar of profit to the bottom line and to positive cash flow. Accordingly, any of these activities that can be eliminated or reduced will result in direct increases to the bottom line and positive cash flow. CONCLUSION The production/service costs the company incurs represent the most significant cause of company cash outflows. In order to improve cash flow, therefore, it is essential for the organization to control those costs effectively. While cost control is a well-accepted way for a company to improve its profitability, its relevance to cash flow is often not understood, not recognized, or (in the worst case) deliber- ately ignored. Benchmarking and ABC are two formalized methods that can be used to institute better cost control within the company. Benchmarking allows the com- pany to compare its processes and related costs to objective outside standards— methods developed by others and proven to be best practices. ABC is a method of analyzing company costs to determine just what drives those costs and assigning 174 Cost Reduction Analysis Procedures the costs to particular products or services based on how many of those drivers are actually used by the particular products or services. In this chapter we have attempted to provide some illustrations of how these techniques might be applied. While the examples are necessarily illustrative rather than definitive, an understanding of the principles underlying the techniques should allow them to be adapted and applied to virtually any company situation. THE GREATEST CAUSE OF CASH OUTFLOWS IS OPERATING COSTS. THE GREATEST OPPORTUNITY TO IMPROVE CASH FLOW IS TO CONTROL OPERATING COSTS. Conclusion 175 176 CHAPTER 6 Analyzing Non-Value-Added Functions CONVERT NON-VALUE-ADDED ACTIVITIES TO VALUE-ADDED. T he cash management study starts at the top of the organization. That is, top management should define and communicate its strategic plans for the company, including areas of expansion, retrenchment, and status quo. At the same time, management should identify the businesses they want to be in, the businesses they do not want to be in, their basic business principles and belief sys- tems, and their expectations for each function within the organization. With the clear identification and communication of management’s expecta- tions, each function will have a clear idea of where it is heading and the basis for its evaluation. The purpose of the cash management study then becomes one of a helping agent, assisting each function to achieve its stated goals and objectives as related to management’s expectations. The performance of the cash management study is thus less a critical evaluation of what a particular function is doing and more an appraisal of what needs to be done to help the function achieve its goals and become the best it can be at the least possible cost. As the study team works with each function within the organization, it helps that function to understand what it needs to do to become what it should be. As best practices and improvements are recommended and implemented, each func- tion moves toward its proper place within the organization—and the company becomes a learning organization by function and overall. The company achieves its goals and objectives at the least cost possible and maximizes the resultant pos- itive cash flow. In today’s organizational atmosphere of cost cutting, downsizing, and reengineering, cash management must be sensitive in its approach so as to main- tain needed services in the most economical, efficient, and effective manner. Whereas management may be focusing on reducing costs, operations may be focusing on providing an increase in quality services. The company must be care- ful to maintain a proper perspective so that it directs its efforts toward overall organizational goals as well as the individual requirements of each function. A cash management study is an effective process to use in looking at a com- pany’s operations to measure current economies, efficiencies, and effectiveness of results. In addition, the study process assists in the identification of performance gaps—the difference between present and desired operating results as compared with internal goals and external competitors. A thorough understanding of such performance gaps enables company and departmental management to seize these opportunities for improvement. There has always been a demand, and perhaps more so today, to decrease costs, increase positive cash flow, and improve prod- uct/service/customer quality—all directed toward increasing profits. As a way of illustrating how to deal with non-value-added functions, we will use accounting as an example. This is not to say that accounting is inevitably a non-value-added activity. Properly organized and led, accounting can certainly add value to the organization. But it is a function that is often, and sometimes accurately, perceived as not adding significant value. As such it is an appropriate representative part of the organization to use as an example. The approach illus- trated can be adapted to other perceived non-value-added activities within the organization as necessary. LOOKING AT THE ACCOUNTING FUNCTION In the current business environment, the accounting function in many organiza- tions is perceived as a prime candidate for cost reduction and, in extreme situa- tions, for elimination. Many of its functions (e.g., preparing customer invoices, collecting payments, processing vendor payments, preparing payrolls) are viewed by company management as necessary but not adding significant value. In other words, these things may have to be done, but can the company accomplish them with as little cost as possible (none, it hopes)? It is within such a framework that the cash management study may have to work. Rather than analyze how present functions can be performed in a better manner, the company may be asked to look at how such functions can be severely reduced or eliminated. With the nature of most businesses changing from a predominantly mechan- ical operation to a more customer service oriented approach, the company must also appraise the accounting function from this perspective. That is, the company must not only review and appraise the accounting function’s present activities, but must also be aware of the services the accounting function should be provid- ing to its company in-house customers. Accordingly, the study team must work with each function within the organ- ization to assist in redefining its role as expected by top management and the most effective way to get there. The company must also consider the impact of each function on others within the company and how best for all functions to work together in an integrated fashion. The study team must possess the knowledge of the overall direction of the company, management’s desires for the function under review, and the manner in which the two can be coordinated. The cash management study process can assist in reducing accounting func- tion costs through the use of more efficient systems and procedures, along with a Looking at the Accounting Function 177 178 Analyzing Non-Value-Added Functions clear identification of desired results. At the same time, the quality of the account- ing/financial value-added services provided can be greatly enhanced. In effect, the accounting function can be an active value-added function that contributes effectively to the company’s profit and positive cash flow. INCREASE POSITIVE CASH FLOW: DECREASE NON-VALUE-ADDED ACTIVITIES. A cash management study of the accounting functions begins with the analysis of existing practices within the various accounting areas of the company to identify activities and performance drivers, and functions that can be improved as to best practices. Performance drivers are the causes of work (e.g., all vendor invoices must be verified by recalculation) or triggers (e.g., a customer order) that set in motion a series of activities. The cash management study process focuses on ques- tioning such performance drivers and triggers as to their elimination and to the ultimate elimination of the corresponding activities. Significant improvements can be made as study team members ask questions such as: • Is this activity needed? • Why is this activity performed? • Is this position/material really needed? • Can the activity be done better and less expensively in another manner? • Is this step necessary? Does it provide added value? The study process can also include the comparison of similar operations, functions, or activities within an organization to identify opportunities for improvement and best practices within a common environment. For an organiza- tion to maximize the benefits to be derived, it is best for it to fully understand and document its existing systems and procedures. The various analysis steps help to identify critical areas of the company’s activities, related performance drivers, and opportunities for improvements. This may arise as one part of the company, division, or work unit learns from another. In this manner, overall communication processes improve, areas of excellence are identified, and operating procedures are changed to reflect best practices. Once the critical areas within the accounting function are identified, an ini- tial analysis is performed to obtain data on activities such as: • Who is involved and how they relate to the activity, its desired results, and each other. Document such things as the number of individuals, relative positions, and method of organization and management. • Why each individual is involved and his or her value or non-value-added activities. Does each one perform necessary operations, have special Choosing What to Analyze 179 expertise, or have specific responsibility? Or is he or she just excess structure? • What activities are being done and whether each one has to be done, can be done more efficiently, or is being done well (a best practice)? • Why each activity is being done. Does each of the activities relate to desired goals and objectives, and is each one being performed most effec- tively? • What resources are assigned to each activity. Is the assignment most eco- nomical, and are resources excessive, deficient, or proper to achieve desired results? When the study team members have a clear understanding of how the area operates, including such things as performance drivers, organizational, depart- mental, and work unit belief systems, and basic business principles for conduct- ing activities within the area, they can begin to identify the following: • Key aspects of the function’s activities and performance results • Inherent, structural, and performance drivers • Critical operational areas and opportunities for improvement (one part learning from another) • Channels of communication within the company • Pockets of good, desirable practices (best practices, and areas of excel- lence) • Standards for good practices so as to reflect the adoption of best practices Defining the elements of each activity, and determining whether it is a value- added or non-value-added activity, and what each individual does in the process, as well as why he or she does it, is the basis for analysis as to improvements. A list of questions to be addressed is shown in Exhibit 6.1. Some benefits to be derived from the cash management study are shown in Exhibit 6.2. CHOOSING WHAT TO ANALYZE The cash management study team, in consultation with management, decides which accounting functional areas it will include in the study and which areas are to be addressed by management and operations personnel. For instance, the analysis of the accounting and financial functions can be looked at in a number of ways, such as: • Functional. Accounting, information processing, treasury, reporting, and so on • Process. Accounts payable, accounts receivable, payroll, general ledger, budget, cash management 180 Analyzing Non-Value-Added Functions • Industry. Specific manufacturing, retailing, banking, and so on • Business cycle. Based on the concept of closed loop activities such as: • Sales cycle. Sales order—shipping—invoicing—accounts receivable— collections • Purchase cycle. Purchase requisition—purchasing—receiving—vendor invoicing—accounts payable—cash disbursements • Payroll/Labor distribution cycle. Time and job verification—data entry—payroll/labor distribution processing—pay distribution— record keeping • General ledger/financial statement cycle. Subsystem data collection— journal entries—general ledger posting—financial reporting PEOPLE 1. Who is involved? And why? • Number of people • Number of positions • How organized and managed • Current personnel resource demands 2. Are all personnel needed? • Reasons for involvement • What they are doing • Value-added or non-value-added • Vital operation or task • Special expertise 3. Who has responsibility for outcomes? • Hierarchical pyramid: power and control • Management oriented: review and redo • Employee self-motivated, disciplined behavior • Delegation of authority to lowest operational levels • Empire building: work continues – reason no longer valid PROCEDURES 1. Why is the task performed? (e.g., It has always been done this way) 2. Is it necessary or unnecessary? (e.g., That is the way we do it) 3. Does it add value to customer? (internal versus external viewpoint) 4. Is there unnecessary bureaucracy? (e.g., unwieldy hierarchy) 5. Are there ineffective, inefficient, or redundant procedures? 6. What do people do, and why do they do it? (foundation for internal improvements) 7. What are the bundles or groups of value-added and non-value-added pro- cedures and activities? Exhibit 6.1 Cash Management Study Questions Choosing What to Analyze 181 • Cost accounting cycle. Material/labor/overhead data collection—com- puter processing—operating reports—off line action—reporting by task, job, and period ACCOUNTING CANNOT WORK IN ISOLATION. The accounting functions (e.g., accounts payable, accounts receivable, pay- roll, and general ledger) cannot be isolated from those other functions that are supported by and integrated with the specific accounting activity (e.g., accounts payable with the purchasing, receiving, and manufacturing functions). It is think- ing that accounting functions such as accounts payable can be isolated that has allowed them to be drastically cut back in many organizations to the detriment of purchasing, receiving, and manufacturing. In reality, each component of the spe- cific business cycle is equally as important as the others. Therefore, to most effec- tively analyze one of the accounting functions, it is best to look at it as part of its business cycle. For the purpose of an analysis of the accounting activity, each of these accounting functions must be considered as a part of its corresponding busi- ness cycle. 1. Defines existing processes and activities; establishes baseline of accept- able performance (helps to trigger continuous improvement efforts) 2. Identifies gaps in performance in similar internal processes (provides a clear picture of the organization’s problems) 3. Brings all internal operations up to the highest possible level of perform- ance (within existing constraints) 4. Identifies areas of internal operational improvements without going out- side the organization (keeps the information inside the company) 5. Establishes standards for common practices and procedures (overcomes the “not created here” syndrome) 6. Opens communication lines within the organization (focuses resources on problems that affect more than one area) 7. Establishes organization-wide commitment to cash management improvements (recasts the problems facing the company) 8. Establishes groundwork for internal operations efforts (ensures greater results when operations personnel do it themselves) 9. Prioritizes critical areas for cash management improvement opportunities 10. Identifies and classifies the key performance drivers (e.g., organization atmosphere, rigid policies, strict procedures, unwieldy hierarchy, and so on). Exhibit 6.2 Cash Management Study Benefits 182 Analyzing Non-Value-Added Functions IDENTIFYING GOALS AND BASIC BUSINESS PRINCIPLES Prior to the start of the analysis of the accounting functions, the study team should be clear as to management’s goals and expectations for each of these functions. For the management team to identify such goals and expectations, they have to be clear as to the purpose of each of the functions and the results that will be most beneficial to the overall operations of the company. There must be more than just a desire to eliminate unnecessary costs and increase cash flow; there must also be a full understanding of why each of these functions should exist. For example, management may identify goals and desires for each of the major accounting functions as follows: • Accounts payable • The elimination of the function, to the extent possible, where the cost of processing vendor payments exceeds the value to the company in delaying such payments • The elimination of the processing of vendor payments where the cost of processing exceeds the amount of the payment • The least costly most efficient methods of processing remaining vendor payments • The ability to computer integrate accounts payable data with other subsystems such as cost accounting, vendor statistics, manufacturing controls, inventory controls, production controls, and cash man- agement • An economic balance between necessary controls and the cost of imple- menting such controls • Accounts receivable • The elimination of the function, to the extent possible, where the cost of billing, collecting, and processing of customer payments exceeds the value to the company of extending credit to such customers • The elimination of the processing of customer billings and collections where the cost of processing exceeds the amount of the billing • The least costly, most efficient methods of processing remaining cus- tomer bills • The ability to computer integrate accounts receivable data with other subsystems such as credit controls, sales forecasts, customer and sales statistics, collection controls, and cash management • Payroll processing • The least costly, most efficient methods for processing payroll and the maintenance of necessary records • The ability to integrate payroll data with other subsystems such as cost accounting, personnel records, planning and budget systems [...]... Average time to pay invoice 26, 000 $ 4,800,000 $ 6. 40 $ 164 ,400 22 days Payment Statistics Payment Amount Number Percent Amount Percent Under $20 Between $20 and $50 Between $50 and $100 Between $100 and $1,000 Over $1,000 5, 760 8,440 6, 680 1 ,64 0 3,480 22.2% 32.4% 25.7% 6. 3% 13.4% $ 72,000 3 06, 000 561 ,200 1,033,200 2,827 ,60 0 _ 1.5% 6. 4% 11.7% 21.5% 58.9% _ Totals 26, 000 100.0% ... Manufacturing Delta Controls Eager Specialties North Facing 4 ,62 8 4,030 3,848 3 ,61 4 3,432 2,808 17.8% 15.5% 14.8% 13.9% 13.2% 10.8% $ 8 16, 000 782,400 753 ,60 0 724,800 561 ,60 0 412,800 _ 17.0% 16. 3% 15.7% 15.1% 11.7% 8 .6% Subtotals Other Vendors 22, 360 3 ,64 0 86. 0% 14.0% $4,051,200 748,800 _ 84.4% 15 .6% Total—All Vendors 26, 000 100.0% $4,800,000 _ _ 100.0%... 82,000 26, 000 18,000 _ 1 26, 000 34,000 _ 160 ,000 Actual $ 86, 400 28,200 22,700 _ 137,300 36, 300 _ 173 ,60 0 Accounts Payable Manager Accounts Payable Supervisor Accounts Payable Processors (5 @ $18,000) Clerical support (2 @ $14,000) Total Personnel Costs Other Costs Total Accounts Payable Costs 38,000 28,000 90,000 28,000 _ 184,000 12,000 _ 1 96, 000 36, 700 24,300 72,400 22 ,60 0 ... Manufacturing Expenses Total Cost of Goods Sold Gross Profit Selling expenses General and administrative expenses $12,500 2, 260 3, 260 2,080 7 ,60 0 Total Operating Expenses 4,900 1,120 1,480 2 ,60 0 Net Profit Provision for income taxes 2,300 64 0 NET INCOME $ 1 ,66 0 Exhibit 6. 3b Income Statement for Year Ending December 31 ($$ in 000s) 188 Analyzing Non-Value-Added Functions • by each customer... (4 @ $ 16, 000) Payroll Clerks (2 @ $12,000) Total Personnel Costs Other Costs Total Payroll Costs 34,000 22,000 64 ,000 24,000 _ 144,000 10,800 _ 154,800 32,400 18 ,60 0 56, 700 20,800 _ 128,500 8,200 _ 1 36, 700 General Ledger Manager Accountants (2 @ $22,000) Clerical support (2 @ $ 16, 000) Total Personnel Costs Other Costs Total General Ledger Costs 26, 000 44,000 32,000 _ 102,000 6, 000... function: Us = $ 164 ,400; #1 = $128,000; #2 = $111,000; #3 = $84,000 • Accounts receivable • Number of customer bills processed annually: Us = 30,000; #1 = 14,000; #2 = 16, 000; #3 = 8 ,60 0 • Amount of annual customer bills: Us = $12,500,000; #1 = $15 ,60 0,000; #2 = $18,800,000; #3 = $22,500,000 • Cost of accounts receivable function: Us = $ 264 ,100; #1 = $187,000; #2 = $1 56, 000; #3 = $68 ,000 It can be... 9,140 7,580 (2, 160 ) _ 5,420 840 $15,400 Current liabilities Long-term debt $ 1, 960 200 840 560 3, 560 7 ,68 0 Total Liabilities Common stock Additional paid-in-capital Retained earnings 11,240 200 200 3, 760 Stockholders’ equity 4, 160 $15,400 TOTAL LIABILITIES AND EQUITY Exhibit 6. 3a Balance Sheet as of December 31 ($$ in 000s) Net Sales Cost of Goods Sold: Material Labor... min 0.50 0.50 1.00 $6. 40 Number of payments processed per year: 26, 000 Cost of processing annual payments: 26, 000 ϫ $6. 40 = $ 166 ,400 (actual costs = $ 164 ,400) Exhibit 6. 8 Accounts Payable Activities and Costs Although the activities and costs shown in Exhibits 6. 8 and 6. 9 are rough estimates of the processing of accounts payable and accounts receivable, they represent the expenditure of resources... $1,000 Between $1,000 and $5,000 Between $5,000 and $10,000 Over $10,000 Number 14,220 11,810 2,300 1,280 180 210 Percent 47.4% 39.3% 7.7% 4.3% 0 .6% 0.7% Amount $ 898, 560 2, 869 ,830 1,453 ,60 0 3,143 ,68 0 1,138,320 2,9 96, 010 _ Percent 7.2% 22.9% 11 .6% 25.1% 9.2% 24.0% _ Totals 30,000 100.0% $ 12,500,000 _ _ 100.0% _ _ ... 6 Computer check prep checks 7 Mail checks 8 File paid payable 9 Meetings, phone, fax Total cost Cost Element Time Cost Labor 2 min $0.50 Labor 4 min 1.00 Labor Labor Labor Labor, computer Labor, envel., postage Labor Labor, phone 6 min — 3 min 1 .60 — 0.80 2 min 0.50 2 min 2 min 4 min 0.50 0.50 1.00 $6. 40 Number of payments processed per year: 26, 000 Cost of processing annual payments: 26, 000 . Cost Materials $2 ,60 0.00 $ 26. 00 Direct labor Setups 144.00 1.44 Processing 1,305 .60 13. 06 _________ ______ Total 1,449 .60 14.50 ABC costs: Quality control 32.00 0.32 Packing/shipping 64 .00 0 .64 Supplies. 2.0 $30.00 $ 60 .00 $0 .60 Routing/Process Hours 1.5 20.00 30.00 0.30 Purchasing POs 4 75.00 300.00 3.00 Receiving Number 4 12.00 48.00 0.48 Storeroom moves Number 2 18.00 36. 00 0. 36 Work–in-process. situation. THE GREATEST CAUSE OF CASH OUTFLOWS IS OPERATING COSTS. THE GREATEST OPPORTUNITY TO IMPROVE CASH FLOW IS TO CONTROL OPERATING COSTS. Conclusion 175 1 76 CHAPTER 6 Analyzing Non-Value-Added Functions CONVERT