Expense Planning: Understanding the Sensibility of Cash
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Have you completed your expense planning this year? Do you understand how to set targets for margins and metrics around capital efficiencies? Does your business seek better management of its expenses and cash flow? Do you know how to find extra cash flow in your supplier base and put it back to work in your business? In the third installation of vcfo's Budgeting Basics Webinar Series, our panelists discuss the importance of planning for expenses and how to better understand the economics of your business. Josh Tabin, Managing Director for vcfo, and Ted Leitch, Director for Expense Reduction Analysts, share their expertise in expense planning and how to reduce overall expense levels. Both Josh and Ted have extensive experience providing senior-level financial and operational guidance to companies of all sizes and in various industries.
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Expense Planning: Understanding the Sensibility of Cash
- 1. Expense Planning: Understanding the Sensibility of Cash Josh Tabin & Ted Leitch
- 2. vcfo: What We Do Finance Interim or Permanent Finance Support M&A Cash Flow Management Exit Strategy Transaction Support Business Process Outsourcing © 2015 vcfo | confidential and proprietary2 HR HR Audits Employee Development and Training Payroll Strategic HR Plans Policies and Procedures Benefits Recruiting Finance and Accounting Professionals Operations and HR Professionals IT and Technology Professionals C-Suite Executives Technology System Implementation Operational Assessment Project and Program Management Business and Technology Integration Strategy Development
- 3. Expense Reduction Analysts: What We Do © 2015 vcfo | confidential and proprietary3 Expense Reduction Analysts (ERA) helps organizations put additional cash flow to work by further lowering supplier costs, without any compromise to quality and service. With 700+ consultants and analysts who specialize in specific expense category industries, ERA brings intimate "insider” knowledge of supplier industries not available to many internal procurement resources. Armed with the right knowledge and tools, ERA helps, CEOs, CFOs and their procurement teams get better value from supplier relationships without any sacrifices in quality and service.
- 4. Today’s Panelists Josh Tabin Managing Director vcfo Houston jtabin@vcfo.com © 2015 vcfo | confidential and proprietary4 Ted Leitch Director Expense Reduction Analysts tleitch@expensereduction.com
- 5. Today’s Moderator © 2015 vcfo | confidential and proprietary5 Mike Wilfley Executive Vice President vcfo mwilfley@vcfo.com
- 6. Agenda Frameworks for Expense Planning Expense Planning Challenges & Opportunities Q&A © 2015 vcfo | confidential and proprietary6
- 7. Poll Question 1 How does your organization budget? (Multiple responses accepted) a) Top down revenue based planning b) Bottoms up, cost based planning c) Iterative model incorporating both a top down and bottoms up approach d) Don’t know, our accounting team gives us a budget e) We don’t need no stinkin’ budget © 2015 vcfo | confidential and proprietary7
- 8. Budgeting in Context © 2015 vcfo | confidential and proprietary8
- 9. Expense Planning Models A Comparison © 2015 vcfo | confidential and proprietary9
- 10. Expense Classifications It’s expected that every business endeavors to minimize expenses wherever possible and at all times. However, the cost structure that a business operates within can vary depending on their business model. There are two that exist at opposite ends of the spectrum: • Cost Driven businesses look to keep costs as low as possible and attempt to be capital efficient, whether it is achieved through automation, outsourcing or the like. • Value Driven businesses are less focused on the cost to deliver services and more focused on the value received by their clients. Luxury service business would be an example of this. © 2014 vcfo | confidential and proprietary10
- 11. Poll Question 2 What cost structure does your business operate under? (Multiple responses accepted) a) Cost driven b) Value driven c) Somewhere in between cost and value driven d) Can you go back to that slide? © 2015 vcfo | confidential and proprietary11
- 12. Expense Characteristics Regardless of the cost structure that a company operates within, all expenses have the following characteristics: • Fixed costs • Variable costs • Mixed costs • Economies of scale • Economies of scope © 2014 vcfo | confidential and proprietary12
- 13. Expense Types for Planning Expenses come in two categories for planning purposes: cash and accrual. • Cash expenses are real dollars that will be paid out at some future period either within the reporting period as cash or in a future reporting period through accounts payable. • Accruals are expenses recorded for GAAP purposes that are not associated with any cash payments. These items may represent reserves for bad debt, inventory or depreciation/amortization of capitalized assets. Both expense types are important for planning purposes: cash expenses represent costs of the business that need cash flow to support while accrued expenses show true accounting profits which feed balance sheet items for lenders to calculate spreads from. The use of accrued expense in your budgeting process is a byproduct of what the intended use of the projections are. Management should understand the cash impact of plans as well as the accounting impact on earnings and ratios. © 2014 vcfo | confidential and proprietary13
- 14. Company Expenses A business will have expenses in the following areas of the financials: • Cost of goods • Operating expenses • Non-operating expenses • Capital expenses © 2014 vcfo | confidential and proprietary14
- 15. Planning Methodologies For most companies, planning starts with revenue. Sometimes, revenue planning is a function of costs. Here’s a recap from our revenue planning webinar: The methods for planning revenue fall into two primary categories: • “Resource” based projecting • “Market” based projecting Leverage both models in parallel and use the lower of the two forecasts to generate the most effective revenue targets. • Revenue likely won't exceed the level justified by your resources or the level justified by your market potential. © 2014 vcfo | confidential and proprietary15
- 16. Resource Based Expense Planning The first step in preparing a resource-based projection is to identify key resource factors that will produce or limit revenue for your business. This means that you are effectively setting your revenue targets by first setting the capacity constraints of your expense levels. These expenses may include the following: • Labor costs (production driven model) • Facilities rent and costs • Sales costs (quota driven model) These costs are usually predicated on historical and current levels. • For example, your company adds a salesperson who has a quota of $X, and by adding that resource and expense, you drive additional sales volume. Or, your company adds a production line in the form of capital expenditures which adds the ability to double or triple production capacity, hence driving revenue upward. © 2014 vcfo | confidential and proprietary16
- 17. Poll Question What could your company do with an additional 20% added back into your budgets? a) Hire more people or prevent layoffs b) Make capital improvements, such as purchases c) Fund projects that previously missed the budget d) Take a company cruise to the Bahamas © 2014 vcfo | confidential and proprietary17 Poll Question 3
- 18. Hidden Cash Flow: The Opportunity © 2014 vcfo | confidential and proprietary18
- 19. How is That Possible? © 2014 vcfo | confidential and proprietary19
- 20. Procurement Best Practices 10 Common Misconceptions © 2014 vcfo | confidential and proprietary20 ONE Suppliers give similar pricing to similar clients and customers 01 TWO Your strategy and expertise in purchasing in one cost category will produce similar results in another 02 THREE National pricing agreements are always better than local or regional agreements with the same supplier 03 FOUR Supplier loyalty translates to best pricing and service 04
- 21. Procurement Best Practices 10 Common Misconceptions © 2014 vcfo | confidential and proprietary21 FIVE More volume always gets you a better deal 05 SIX Getting three bids will get you the best price 06 SEVEN You’re asking the right questions in your RFPs 07 EIGHT Group purchasing will always get you the lowest cost 08
- 22. Procurement Best Practices 10 Common Misconceptions © 2014 vcfo | confidential and proprietary22 NINE Lower price means lower quality and service 09 TEN Lowest price is the same as lowest cost 10 IS YOUR ORGANIZATION LIMITED BY SOME OF THESE BELIEFS?
- 23. You Can Recover More Cash Flow Top 10 Best Practices in the Path to Exceptional © 2014 vcfo | confidential and proprietary23 GOOD BETTER GREAT EXCEPTIONAL
- 24. Recover More Cash Flow The Path to Exceptional: Getting Started © 2014 vcfo | confidential and proprietary24 01 COMMIT Develop a strategy and plan 02 ANALYZE Analyze your actual purchasing history
- 25. Recover More Cash Flow The Path to Exceptional: Understand Yourself © 2014 vcfo | confidential and proprietary25 03 DEFINE QUALITATIVE NEEDS Understand the qualitative requirements for each cost category. It’s NOT all about price. 04 UNDERSTAND YOUR ASSUMPTIONS Many of the assumptions & processes that drive supplier requirements are no longer valid, appropriate or necessary. Improvement and flexibility here often lead to lower supplier pricing.
- 26. Recover More Cash Flow The Path to Exceptional: Understand Suppliers © 2014 vcfo | confidential and proprietary26 05SUPPLIERS & THEIR INDUSTRIES Understand each of your suppliers’ businesses and their industries like you understand your own • Market trends, pressures & cycles • Terminology & jargon • Business practices & unique ways to contract • Cost & price drivers • Pricing benchmarks for similar companies, with similar spends, in other geographies • Their true differentiation among their competitors
- 27. Recover More Cash Flow The Path to Exceptional: Re-evaluate © 2014 vcfo | confidential and proprietary27 06 RE-EVALUATE Re-evaluate your current supplier relationships with these new insights 07GO TO MARKET Go to market with written bids and proper frequency, and ask the right questions
- 28. Recover More Cash Flow The Path to Exceptional: Structure the Deal © 2014 vcfo | confidential and proprietary28 08 NEGOTIATE Negotiate more effectively • Leverage all your new insights • Separate negotiator and relationship owner • Use pricing behavior benchmarks • Help the supplier save money • Know all the contracting options 09DECIDE, IMPLEMENT, MONITOR Implement quickly • This is equivalent to a cash leak! Fight price creep • Many mistakes: many line items and human error • Processes: e.g., off-contract purchasing • Publish pricing & SKU changes • Rebates, incentives, credits, etc. Suppliers have many methods to recover margins
- 29. Recover More Cash Flow The Path to Exceptional: Maintain It © 2014 vcfo | confidential and proprietary29 10CHANGE THE CULTURE Embed a real expense control mindset into the company culture • Mindset first - techniques, policies and procedures second • No cost is sacred • Are they spending money like it’s their own? • Do they understand the impact on the company (e.g., $1 saved = $5-$10 in sales)? • Have you ensured that changes are implemented on both sides? • Are cost-saving suggestions encouraged and pursued? • Are they integrated into the penalty/reward systems?
- 30. How to Recover More Cash Flow © 2014 vcfo | confidential and proprietary30
- 31. Key Takeaways • Expense planning is typically based on historical trends or existing business constraints (i.e. what you can afford to spend). This may or may not drive your revenue projections. • Understanding your business model is critical to developing a budget for expenses: cost- or value-based business models. • Expenses can be cash or non-cash and knowing the difference helps plan for cash and accounting requirements. • Take the time to discover if some of the common misconceptions are present at your company and negatively impacting your company’s procurement efforts. • Gain knowledge about the specific expense from your company’s key stakeholders as well as “insider knowledge” of your vendor’s industry. This will provide valuable leverage and result in greater savings. • Commit to a plan, prioritize, implement and audit on an ongoing basis. Expense management is on ongoing process, not a once-a-year exercise. © 2015 vcfo | confidential and proprietary31
- 32. Q&A © 2015 vcfo | confidential and proprietary32
- 33. Thank you We will be following up with you by email shortly to provide more details on receiving CPE credit. Happy expense planning! 33 © 2015 vcfo | confidential and proprietary
Editor's Notes
- Mike Founded in 1996, vcfo’s original core offering was fractional or part-time CFO solutions. The company’s services have long since evolved to include an integrated suite of finance, HR, technology and recruiting support, including outsourcing and consulting solutions that improve operational performance and optimize productivity.
- Mike
- Mike
- Mike
- Mike
- Josh asks, Josh responds
- Josh high-level overview of budgeting and the first webinar Mention budgeting series Mid-November
- Josh
- Josh
- Josh asks, Josh responds
- Josh Regardless of the cost structure that a company operates within, all expenses have the following characteristics: Fixed costs remain the same regardless of use or sales volumes. Examples of fixed costs are salaries and rent. Variable costs will fluctuate based on the amount of revenue produced in each period. Examples of variable costs are raw materials used in production, utilities, etc. Mixed costs have some element of fixed and variable costs to them. Most wireless phone plans have a monthly fixed charge and variable costs for overage on usage. Economies of scale are cost advantages that businesses enjoy as production our output increases; for example, volume discounts on materials. Economies of scope are cost advantages that businesses enjoy as the scope of operations increases; for example, channel distribution sharing across business lines.
- Josh
- Josh A business will have expenses in the following areas of the financials: Cost of goods sold are expenses recorded on the income statement that represent the expenses required in the delivery of services or products that result in revenue. Operating expenses are costs incurred in the normal course of business that are not directly related to the recognition of revenue. These will include salaries, advertising, office rent, etc. Non-operating expenses are found outside the course of normal business that are not linked to daily operations. This will typically include taxes, non-operating losses, etc. Capital expenses are not recorded on the income statement but instead on the balance sheet. These are typically investments in equipment, land, buildings, etc. that have lives longer than a year. Their values are depreciated or amortized over the life of that asset.
- Josh
- Josh
- Josh asks, Ted responds
- Ted
- Ted Suggest the business “Set up” in general makes this not only possible, but likely. #2: Explain-Understanding each supplier and their industry like your own. The audience is an expert on their company and their industry. They’re insiders, and for example, If they left their industry, you could help; Then tell them we’ll talk much more about this later. #4: Most companies lack Benchmark Data to provide a pricing frame of reference for best pricing. We want to use this bullet as another reason why they would want to talk to us after the session. We can say that the availability of this data varies greatly among industries, so if you are thinking about taking us up on the offer that “Bob”—the host set up, I can talk to you about what might be your best option.
- Ted
- Ted
- Ted I can show you how you can keep these from limiting your ability to recover significant cash flow for your organization.
- Ted
- Ted Getting Started on Your Path from Good to Exceptional 1. Getting the Results requires a Commitment---Develop a Strategy and a Plan A Plan is Not: Deciding to review the expense when it comes up for contract renewal Asking for a new quote from your current supplier Picking the top 3 industry names and pitting them against each other 2. Analyze and Validate your Actual Purchasing History How much do you actually spend? How many suppliers are you using? Are you buying what you thought you were buying? Who is really buying---How and When? How much of your purchasing is off-contract? Getting the credits you thought? Billing errors? Changes in Supplier Part Numbers? Pricing tied to the right Index? Bundling or Unbundling properly? The Answers to these questions will surprise you. Illustrations: “one of my client CEOs couldn’t believe her organization was paying $19K in diapers”
- Ted 3. Understand your Qualitative Requirements for each Cost Category It’s Not just all about the Price---You are looking for the greatest value---Most Benefit at the lowest price. Service Level Agreements, Quality & Delivery Records, Account Management, Problem Escalation Processes, etc. 4. Understand your Processes and the Real Usage Behaviors that drive your purchasing requirements When you Analyze your actual purchasing history and define your Qualitative needs, you will find that you will question why you do what you do. When we take a client through this process, they are surprised to find that business processes and assumptions that drive many of their supplier requirements are no longer valid, appropriate, or necessary. You will likely find that many processes that drive purchasing requirements to suppliers need to be updated. As you re-evaluate these requirements you can have great impacts on lowering pricing. Always ask how your Processes can integrate into your suppliers’ processes? Examples: Delivery/Pick up times? Because once an important overnite was not available for normal picked up time, they scheduled a special late pickup time every day. When they realized this, they changed it for normal pick up time daily, and only seldom called for a special late pickup. Saved ___%. Order Frequency Client ordered everyday every 2 weeks saved 37% Integration into Supplier systems---technology and/or processes? ?
- Ted This one of the cornerstones of our message. In describing the meaning of each these bullets, for at least 4-5 of these bullets, use case study examples from various categories to illustrate how much savings “insider” knowledge created that the Client’s Internal Procurement team could have never found. “You already understand the power of this concept” You all have intimate knowledge of your business and your industry---You are insiders If I needed to construct a relationship with a supplier of your products and services, You all could give me valuable insights for how I could leverage the unique attributes of your industry to construct the highest value relationship. Apply the power of that to each of your suppliers and get an insider understanding of: Market Trends & Pressures: Time purchases, Competitive/aggressive behaviors, New Developments & Alternatives: Box Mfgr—mass customization Terminology: Suppliers quickly assess your sophistication; Also, you may be buying the wrong thing. Re-certified, remanufactured, refurbished, compatible, etc can all be very different things. Business Practices & Unique ways to Contract: Example: Some will buy out your contract; Cost/Price Drivers: Ordering patterns, frequency, location, timing, all have different impacts on supplier industries. They all have a different set of costs to serve. Example: Atlanta said no truck deliveries near the Olympics from 6am-6pm. 30% of companies found night deliveries better. Disney known for this, too. Issues in dock congestion, pricing, error rates, etc. Pricing Benchmarks for Similar Companies, with Similar Spends, in Other Geographies True Differentiation Among Their Competitors
- Ted 3. Understand your Qualitative Requirements for each Cost Category It’s Not just all about the Price---You are looking for the greatest value---Most Benefit at the lowest price. Service Level Agreements, Quality & Delivery Records, Account Management, Problem Escalation Processes, etc. 4. Understand your Processes and the Real Usage Behaviors that drive your purchasing requirements When you Analyze your actual purchasing history and define your Qualitative needs, you will find that you will question why you do what you do. When we take a client through this process, they are surprised to find that business processes and assumptions that drive many of their supplier requirements are no longer valid, appropriate, or necessary. You will likely find that many processes that drive purchasing requirements to suppliers need to be updated. As you re-evaluate these requirements you can have great impacts on lowering pricing. Always ask how your Processes can integrate into your suppliers’ processes? Examples: Delivery/Pick up times? Because once an important overnite was not available for normal picked up time, they scheduled a special late pickup time every day. When they realized this, they changed it for normal pick up time daily, and only seldom called for a special late pickup. Saved ___%. Order Frequency Client ordered everyday every 2 weeks saved 37% Integration into Supplier systems---technology and/or processes? ?
- Ted 3. Understand your Qualitative Requirements for each Cost Category It’s Not just all about the Price---You are looking for the greatest value---Most Benefit at the lowest price. Service Level Agreements, Quality & Delivery Records, Account Management, Problem Escalation Processes, etc. 4. Understand your Processes and the Real Usage Behaviors that drive your purchasing requirements When you Analyze your actual purchasing history and define your Qualitative needs, you will find that you will question why you do what you do. When we take a client through this process, they are surprised to find that business processes and assumptions that drive many of their supplier requirements are no longer valid, appropriate, or necessary. You will likely find that many processes that drive purchasing requirements to suppliers need to be updated. As you re-evaluate these requirements you can have great impacts on lowering pricing. Always ask how your Processes can integrate into your suppliers’ processes? Examples: Delivery/Pick up times? Because once an important overnite was not available for normal picked up time, they scheduled a special late pickup time every day. When they realized this, they changed it for normal pick up time daily, and only seldom called for a special late pickup. Saved ___%. Order Frequency Client ordered everyday every 2 weeks saved 37% Integration into Supplier systems---technology and/or processes? ?
- Ted
- Josh