Profitability is the key to driving a successful business, and how you do this will undoubtedly make or break many a CFO, with many sleepless nights trying to unlock the secrets to this success. Unless you are an NFP (Not for Profit) business you get up in the morning, get dressed, and off to work to play your part in driving success and delivering sustainable profits. And so, the cycle continues …
However, this cycle can easily become broken via a large variety of means, for example; new competitors, threats from competitor product innovation, customer migration, poor quality product manufacture, reputational risk and customer dissatisfaction, macro environmental impacts i.e. have you heard of Brexit?
As a Director and CFO of Merlin Consultancy (Global) Ltd I would like to provide you with insight and tools ‘as your extra pair of safe hands.’ These blogs will provide you with ideas and thought inducing opportunities for how a CFO can play their part to risk mitigate the aforementioned cycles. However, the focus today is on cost control and specifically overhead management within your company.
From our experience the curse of overheads in any business can generally follow a life cycle which trends the following six stages;
- High overhead to sales ratios in the initial year of start up
- Overhead focus and maximizing returns post start up
- Sales focus takes priority as the business matures, and the business tackles opportunities and threats
- Leaving overheads to their own devices to accumulate and spread like a disease across the company
- Sales start to plateau and the business settles into a planned trajectory.
- Immediate realisation that overheads are too high, out of control, or that Macro threats mean that you need to cut your cloth accordingly and all aspects of the business addressed
This may resonate with CFO’s who have often grappled with fellow execs over wage constraints, marketing budgets, premises decisions, travel & entertainment levels, procurement decisions etc, which have seen all of these, and more, increase to unsustainable levels or to levels that are completely out of cinq with sales volume and business activity.
Fast forward to 2019 and it’s time to cut the clutter and spread of the overhead disease and drive them back down to a level commensurate with business activity and to a cost which beats your sector competitors and gives you that competitive edge again. I know that many CFO’s are still grappling with ongoing regulatory environment demands, planning for/assessing Brexit, and trying to deal with a myriad of other challenges. I know, because we are actively helping clients with these very demands too.
I’ve used and can recommend various tools and methodologies which are available to help get more control on overheads and understanding their absorption across your business. Many of my clients have adopted these with fantastic results, so for starters;
Understanding your cost base and driving down overheads
Good discipline is needed across the following;
- Engagement and Communication of the company’s priorities: When everything is a priority, nothing is a priority. Communicating and driving from the top down the need to control overheads is a great starter for ten. However, this needs careful thought around the messaging and delivery, and attention to tracking how this is embraced across your fellow C-Suite and senior management.
- Clear definitions of success: Everyone in the company may agree that “delivery of a 5% reduction in overheads” may be the goal but differ on what exactly constitutes success. KPI’s and metrics which underpin the delivery are just as important as the £ reduction itself. The KPI’s will also help you track and maintain the hard-won rewards and keep the menace that is ‘creeping overhead disease’ from returning too soon.
- Motivation: Most people are driven by finding purpose in their work and a desire to succeed. A small team who own the communication and KPIs for your overhead reduction programme will provide clear and constant feedback on progress towards the goals and help enable everyone in your company and culture to play their part in the immediate success, the rewards, and ongoing war against overheads.
- Activity Based Management (ABM): You need to quickly establish what exactly is driving your cost base and particularly your overhead consumption. A simple yet effective ABC/M model can get to the nub of the key issues quickly with typically a 70%+ confidence level. Having implemented and delivered many of these, my advice is not to expend huge efforts of time and money on bespoke Activity systems (unless already in place within your organization) at this stage. A prototype model can be built within MS Excel or similar – build time totally dependent on data availability and buy-in from your C-Suite peers. Don’t aim too high at this stage, 70%+ accuracy is more than enough to provide pointers to what parts of your business are driving the costs and overheads. Engage a third party to lead and drive this work as it’s critical that the business see the output as being independent as this will provide you an immediate ‘antibiotic’ with a step-up achieving buy-in and confidence.
- Chart of Accounts (COA) / Trial Balance: ‘What’s not seen is not heard………’ – this truism is all too prevalent in business these days. Standard cost centre reporting often rolls up data from your COA’s and for reporting on a page reasons the ‘devil in the detail’ is hidden. Lines of overhead as reported at nominal level in your trial balance can go unmissed as they are rolled up into Management Reporting line items which often hide adverse variances and deep-rooted problems. As the saying goes, “What gets measured and reported gets managed.” The commitment of the company to elevating certain nominal codes and reviewing these means that nothing is left to chance and you can achieve that extra ‘stretch’ to attack those overheads.
- Use a set of SMART metrics: (will delve into these in more detail in my next blog) and link these to overhead controlling KPI’s which are simple for your peers to understand and buy-into, yet effective and easy to maintain and report on.
- Engage an independent firm to undertake a simple and cost-effective Business Diagnostic (BD): a further blog on these, which considers your whole value chain, not just costs/overheads to be issued. From my experience of implementing/delivering BD’s these will more than pay for themselves several times over from the insightful management information (MI) you will receive and bottom-line improvements in a very short time period.
Characteristics of Successful Cost/Overhead Management Programmes
The scope of the programme MUST be clear and everyone needs to fully understand what the programme is going to achieve, including their input and commitment requirement. It’s not motivational if it’s unclear, then it’s not even useful and will certainly fail before you even get off the starting blocks. Engage a 3rd party firm to take the time and effort away and let the CFO focus on other priorities.
Leads to Action
Everyone needs to know how their actions, whether individually or as teams can help the company meet the objective of fighting the overhead disease. As a driver of the activity levers each and every C-Suite member has an impact on how quickly, and from where, the overhead disease can spread. Informing C-suite of how these levers work and their degree of impact will lead to action and acknowledgement of the problem. – this is a good place to be.
I have seen so many such programmes fail because they tried to be too complex and methodological. ‘KEEP THEM SIMPLE’ is my mantra and best advice. Yes, downstream, once the business is wholly on the same page then you can start to incorporate the shiny suits, the designer clothes, the salon haircuts, but please keep it simple to begin with. As soon as you start building in complexity then fellow C-Suites will lose interest and think it’s, ‘just another finance fad thing.’
Communicate, communicate, communicate is so important throughout all stages of the programme lifecycle. Regular working groups from across the C-suite, and C-Suite updates are essential to winning your war on overheads.
But that’s just the start.
Then it’s time to communicate throughout the company and set up monitoring systems.
Are You Ready to Win the fight with Overheads and prevent the disease from spreading?
You know how to manage your day to day operations and are undoubtedly mired in a plethora of other priorities. We are here to help and be ‘your extra pair of safe hands’ so please ‘click here’ if you would like to bring in the wizards from Merlin to win your war on costs and overheads.