The short answer is “yes”.
Overhead allocation methods traditionally use revenue dollars, direct labor hours, square footage, or production hours to spread overhead costs to their products, services, customers and suppliers. If your organization is utilizing a traditional allocation approach, you are most likely not getting the most accurate total cost information.
Costing techniques have evolved considerably since the late 1980′s have been hindered by their significant resource requirements to maintain. Advanced technology and techniques now provide the tools and methodologies to allocate overheads far more accurately.
Current tools provide:
- Detailed total cost and profitability product, service, customer, supplier
- Insight as to where profit is earned or where it is lost
- Insight into sustainable cost reduction opportunities
- Product and service costs at a detailed level
- Detailed customer cost to serve information
- Insight into how complexity affects profitability
- Focus on value added and non-value added activities
- Insight into how to attract and retain high-value customers / suppliers
Even if your organization is already profitable, inaccurate cost information leads to poor decision making. On Target’s costing solutions focus on producing decision quality cost information. This often results in dramatic shifts in the profitability of your products, services, processes, customers, and suppliers.
Operating costs that have been traditionally labeled as “fixed” deserve a closer look. The term “fixed cost” can be considered a misnomer. The traditional definitions of fixed and variable costs still hold true, but we need to expand our thought process to better understand the degree to which they are controllable over time.
The first step in reducing “fixed costs” is to change the way you view all costs, especially given the current economic conditions.
Variable costs such as material costs, labor and benefits vary with per unit production or service delivery.
Fixed costs such as utility rates, insurance premiums, and lease payments have often been deemed as uncontrollable during the contract period. Many of these agreements/contracts can potentially be renegotiated.
- We’ll work with your team to develop both an internal and external set of partners to address each agreement/contract.
- We’ll brainstorm ways for both sides to benefit from renegotiating the contract. It is important to take control of all costs with a comprehensive continuous improvement program.
The current economic conditions have certainly added complexity and variability to the project planning, analysis and execution.
The source of the target miss, in most economic times, is likely in the level and focus of the due diligence prior to project approval. One element that is often slighted is clearly understanding the key stakeholders’ opportunities and challenges relative to the potential project. Understanding the core issues is essential in developing realistic and achievable targets. In addition, do not underestimate the power of resource commitment and organizational energy in achieving results.
Properly planned and executed projects realize gains in most market environment. This includes having the right internal team, business consultants, and support resources to insure a successful outcome. Project return on investment (ROI) calculations should always contain the cost of all resources.
In terms of justifying the consulting services, don’t hesitate to inquire about not only flexible rates and payment terms but outcome based options (see On Target’s article on this issue of the newsletter). Quality consulting partners always realize that bottom line results drive long term relationships.
Here are a few tax planning tips (seek your tax professional for specific advice):
- Investigate other business structures for your business – Whether you are a C Corp, an S Corp or a Sole Proprietor can determine how much, or how little, you will pay in taxes.
- Employer Fringe Benefits – If you are considering adding new benefits, such as a retirement, health or life insurance plan, doing so will provide additional tax deductions.
- Choose the best inventory method – In a period of rising prices, the use of the LIFO inventory method can produce income tax savings. The opposite is true for FIFO. You can change from one to another but generally you need to get IRS approval.
Measuring the right performance indicators should be a key element of any business strategy. A common expression you may hear is “if you measure everything, you measure nothing”. Here are some of the more commonly used indicators, but not necessarily the right indicators (often financial):
- Profitability – Net income or EBITA of the business.
- Gross Margin – Business, product or product line margin before operating costs.
- Cash Flow – Cash available from operations (Cash is King!).
- Inventory Turns – How long it takes to turn the company’s inventory.
- Sales Growth – Period over period sales growth expressed as a %.
- Receivable Days of Sales Outstanding – The number of days to collect outstanding receivables.
On Target’s Solutions focus our clients on the right or key performance indicators (more leading than lagging) such as:
Profitability by Customer, Product, Process, Service or Supplier -Assigning operating-O/H cost to customers, products, services, and/or suppliers provides a more accurate view of cost and profitability. On Target has a Solution that quickly assigns cost (see Partner Spotlight in this Newsletter).
Employee Attendance & Retention – Indicates if your employees come to work and stay with the company. Measures the effectiveness of your overall business and resource strategy.
On-Time Deliveries & Backlog – Leading indicators of customer satisfaction and sales growth.
Interest Rate Coverage – A ratio that lenders use to determine how easily a company can pay interest on their debt. If it is important to the lenders, it should be important to your organization.
Lost Sales – On Target calls this the “Magic Metric”. In most cases this is not available, but we have creative ways to approximate this with our clients.
The process to determine the right indicators involves cascading the company’s Mission/Vision into focused strategies, and then determining what are the key indicators that measure the performance of the strategies.
Contact On Target to discuss our extensive experience in developing the right indicators for these industries; manufacturing, retail, distribution, government, defense.
Our 2-Day Business Assessment leverages our expertise to focus your organization on where to allocate valuable time, effort and company resources resulting in improved profitability.
We use our 50+ combined years of diverse industry experience to uncover hidden cash resources in a very short period of time.
We have created a step by step review of the organization that targets key business functions and processes. We then compile the results into our OnTop Score indicating where the profitability opportunities exist.
The solution includes our published results and a presentation to the key stakeholders.
Contact On Target to discuss your specific questions.
Our industry experience spans these industries:
- Transportation & Logistics
Business Tax Credits & Deductions:
Whether it’s energy efficient property improvements or the bonus depreciation provision provided through the Economic Stimulus Act, consult your CPA or tax planner on how to best take advantage of the various options.