Arrigo Magno - 5 Cost optimization mistakes to avoid for Finance Leaders
Arrigo Magno – Finance Business Partner
Despite more than 20 years of experience, I am still passionate about everything that orbits around the world of business and finance.
I have held managerial positions of responsibility in auditing, accounting and financial control in global leading companies I like being considered a Finance business partner both supporting the process decision-making and challenging the business to ensure that its strategies align with financial goals.
5 Cost optimization mistakes to avoid for Finance Leaders
I recently read an article issued by Gartner (a research and advisory firm providing information, advice, and tools for leaders in HR, IT and Finance functions), about the most common mistakes that companies make in their cost optimization plans.
Considering that most companies (including the one I work for), in the face of the Covid-19 pandemic, have started or are preparing to put in place measures to reduce their cost base, I read the article with great interest.
Here are the most common mistakes I would like to share with you:
∞ making generic cuts with unrealistic goals
Many companies respond to economic crises by setting unrealistic cost savings targets and indiscriminately cutting costs across the board. Across-the-board cuts penalize the most efficient parts of the organization and can cause the erosion of important sources of value.
Indiscriminate cutting costs is the result of a big mistake: confusing Costs cutting from Cost optimization.
Costs cutting eliminate waste and remove capabilities that are no longer part of the strategic plans, thus freeing up resources, time and funds to reallocate on prioritized areas.
Cost optimization improves the efficiency of capabilities that are required today to enable the organization to catch up to, and keep up with, the competitors. It is a continuous effort, deliberately driven, to manage spending and cost reduction while maximizing business value.
In other words trying to get the most out of what we are spending.
Let's see now some typical examples of indiscriminate cutting:
#1 Overtime: the Leadership Team requests to eliminate overtime throughout the organization. If in some departments this can happen without major problems, the total ban on overtime in another department, which is for example working on a sales campaign with a high impact on sales, could generate a loss of value.
#2 Layoff: the more people laid off, the more money saved: correct, right? This is a typical cost-cutting error. Companies must be very careful not to make indiscriminate staff cuts. Talents and people in key roles need to be preserved. The more talented and strategic people are laid off, the more intense the negative effects on business initiatives, performance and outcomes. Besides layoffs mean it will later cost more time and money to restore the workforce when the market recovers.
#3 Long-term investments: When it comes to saving money, it can be tempting to abandon long-term projects, processes or services in favour of more immediate, “plain vanilla” alternatives. Leaders should not automatically sacrifice long-term initiatives just because they are long term. Always keep in mind the value of the business when decide what to cut.
#4 Suppliers: When looking for ways to cut costs, switching a business partner to a less-expensive alternative may seem like a good idea, particularly if the decrease in quality and efficiency has no immediate consequences. This could be a big mistake. Let's think, for example, of changing the supplier who offers the logistics service which constitutes an element of competitive advantage, or changing the supplier of the main raw material of a product recipe. Again, cutting costs without any strategic thinking will likely mean loss of business value.
∞ failing to sustain behaviour change
Most cost-cutting strategies are short term and fail to preserve the behavioural change required for smart spending decisions in the future. Although some costs (such as travel and expense) can be capped by policy rules and restrictions, many costs that were removed inevitably occur again as budget owners and managers pursue spend and initiatives in the name of supporting growth. The result is another painful round of cost reductions when the next crisis hits.
∞ slowing down the organization
Only a small number of companies consistently invest in growth opportunities without creating excessive complexity. Complexity drives almost half of the growth in corporate overhead costs. Whenever new business opportunities are hunted, especially for initiatives that aim to overcome the crisis, it is necessary to evaluate the complexity generated by these, because complexity means both direct costs (for example the proliferation of SKUs) and indirect costs (in terms of slower decision making).
∞ choking off needed innovation
Aggressive cost reductions can drain resources from high-impact innovation. They can also promote an environment where innovators do not feel permissioned to request enough multiyear funding required to ensure their initiatives are successful.
∞ underestimating investments in digital
Although most organizations have plans for digital business transformation, only few have achieved it at scale. More than 50% of CIOs are self-funding their digital business initiatives through cost savings from other budget areas. However, realizing scale from digital efforts requires more substantial funding than what is generated by IT budget savings. Digital transformation is not a zero-sum game: the risk is to face subscale investments in digital that do not generate returns.
Based on my professional experience, I have seen some of these errors reiterated several times. And working in a large structured multinational company is not a guarantee of success in the implementation of cost savings plans.
So how to avoid these mistakes and implement a successful cost cutting plan?
Executive leaders should use a decision framework to evaluate the costs, benefits and viability of different cost optimization initiatives. By selecting some decision factors, they can group and map cost optimization initiatives on a grid: this helps leaders visualize the cost, effort and reward associated.
Examples of Decision Factors are:
Q Potential Financial Benefit expected (Large / Medium / Small)
Q Business Impact (Positive / None / Negative)
Q Time Requirement (short / medium / long term)
Q Degree of Organizational Risk (High / Medium / Low)
Q Investment Requirement (High / Medium / Low)
This method will help in prioritizing the different cost optimization initiatives as shown in the table below.
In any case, the landmark must always be the market and the value of the business. When costs are higher than average, it is natural to look at reducing them. However, executive leaders should be aware when increased spending is leading to above-average performance. Only when increased spending has no link to an increase in business performance, executive leaders should question the expenses.
I think the difference between a successful cost optimization plan and a failed one is in the approach: it is no longer simply a cost-cutting (save-to-turnaround) and not even an optimization of costs for growth (save-to-grow) but rather of a disruptive approach aimed at enabling agile business strategies and digital solutions (save-to-transform).
Easier said than done, but keep trying.
Given by the author and published on this website in 2021
Pierre Mévellec - Cost Systems: a renewed approach
doctor in economics and in management sciences, university professor taught in Rennes and Nantes. He interrupted his career for 2 years to be an industrial management accountant.
In 1993 one of his articles received the first prize awarded by the FMAC. ABC call for a French approach. He has published many books and articles. You can find most of them on the Research Gate site. He was a consultant for large French firms as for public services.
Cost Systems: a renewed approach
"This dissertation, after having proposed a meta-model of cost systems, presents a calculating machine that applies regardless of the system chosen. The author's wish is that we no longer spend time on the computational part but that we concentrate on analyzing the relevance of cost systems."
The content is available in the file attached below
You can find this contribution also in the book "Cost systems: a renewed approach" by Pierre Mévellec previously published on https://www.researchgate.net"
Given by the author and published on this website in 2020
Joseph F. EL-Ashkar - The Cash Flow Management & Results
Joseph F. EL-Ashkar
With over 35 years of applied accounting experience, Joseph is still passionate about his field of specialization. He has held senior positions of responsibility in accounting, financial control, and auditing.
During his career, he has traveled extensively and has been exposed to a variety of cultures and environments. He has also invested time in research and developed an advanced automated financial methodology, the Direct Method Cash Flow which provides real-time analysis for better decision-making.
The Cash Flow Management & Results
Background and Purpose
My objective is to propose an improvement, rather than a sweeping change, to the century-old, well-established double entry accounting convention to enhance our understanding of the information it generates. Although it is obvious that we should not attempt to bypass the traditional accounting equation, we should no longer limit ourselves to the traditional analysis of the results it generates.
During my thirty-eight-year career, as an accountant, auditor and management consultant for small and medium-size business entities, I evolved a methodology to help my clients, their investors and creditors, make better decisions through a stronger understanding of their financial situation and a true transparency of the results of their operations.
The conceptual framework of the proposed methodology consists of tracing each financial transaction, recorded in accordance with generally accepted accounting principles, through its economic life cycle. This is accomplished by synthesizing balance sheet account balances, with their related income statement transactions and their cash flow effect while maintaining the reference to the period (year) when a transaction was initiated.
The statement displays the nature and the source of the investments (self-financing or by means of other debts), and breaks down the results of operation into the following components:
• Unachieved Results
• Achieved Results
o Available for Distribution
o And/or Reinvested
The additional schedules provide further information about the flow of funds used in operation, such as:
1. Linking the funds to the year when transactions were initiated
2. Providing an accurate break down of the uses of funding sources, which I also refer to as Net Financing Position. This information is particularly critical for banks and other financial institutions providing credit to a business entity.
3. Providing the investors and other parties with the accurate status of usage (investment) of the funds in a business entity’s Capital Position.
The statement and the related schedules provide a novel picture of the results of operations that was very useful to my clients, their investors and bankers in making business decisions.
1. Management and the Investors
The recent well-publicized bankruptcies of major corporations have confirmed that the backbone of any business entity and a key to its survival continues to be the flow of funds generated by almost all of its transactions.
The methodology that I propose will help both management and investors gleam an exact picture of the solvency of the business entity by providing a better understanding of its collections and disbursements and their effect on the results of its operations. The methodology will also provide the business entity’s Treasurer with tools to monitor the financial condition of the entity and an “early warning” for any deterioration in that condition.
This will lead to an accurate determination by management of achieved results and, consequently, of profits available for distribution. It also provides investors with a strong tool for monitoring the orientation of their investments.
2. Management and Financial Institutions
The concept of Net Financial Position that is produced by the methodology is a more precise and clear depiction of a business entity’s funding sources and their uses, regardless of the entity’s age and the complexity of its existing financing arrangements.
The schedules presenting the Net Financial Position are a powerful tool in the hands of banks and other financial institutions negotiating and structuring new loans or financing vehicles to business entities.
They provide an accurate basis for projecting the impact that the new financing would have on the financial situation of the business entity, and thus will help determine the credit risk of the entity and the most favorable repayment conditions. These schedules will also be critical tools for the financial institutions to monitor the entity’s performance under the financing agreements.
These tools are also useful to the business entity’s management in monitoring the entity’s Net Financial Position and in projecting its cash flow needs into the future.
3. Management and the Auditors
The accounting profession, worldwide, is currently working hard to ensure that its clients regard the assurance and attestation services they receive as providing added value to their decisionmaking processes. The auditors and their clients expect to accomplish this through an increased usefulness of the auditors’ analyses, reports and recommendations.
The statement and related schedules generated by the methodology that I propose provide a wealth of financial information that is ripe for in-depth analyses of a business entity’s results of operations, its solvency and Capital Position. The results could range from useful recommendations to decision-makers about resource allocations, to “red flags” to auditors for enhanced audit results.
I have applied this methodology and the results have been conclusive and beneficial to management, investors, controllers and financial institutions. The methodology I suggest is easily applied through the use of available information technology either for on-line or subsequent gathering of the necessary data.
Finally, I wish to reiterate that my methodology intends to complement the existing accounting standards and processes by enhancing the understanding of the information they generate and making it more relevant for decision-making purposes.
Joseph F. EL-Ashkar
Given by the author and published on this website in 2020
Sonya M. Gonzalez - Cloud Computing and Financial Data Analytics
Sonya M. Gonzalez – Financial Controller specializing in Cloud Computing and Financial Analytics
Distinguished leader with over 30 years of experience in Financial Applications and Reporting. Created and improved Financial processes using Financial Analytics and leading to increased quality and efficiency, while being consistently at or under budget and on time. Over the past 6-7 years have been heavily involved with Cloud Computing and Financial Analytics.
Cloud Computing and Financial Data Analytics
Accountants have always used analytics to help business uncover valuable insight into organizational financials.
This seems obvious, but with all the recent hype about advanced analytics, machine learning and artificial intelligence, it’s important to revisit our daily context. Analytics enable accountants to identify problem areas and create Standard Operating Procedures to overcome these problem areas.
This is one of the basic principles of accounting that we all learn as we advance through the field of finance.
The profession of accounting is old, with records preserved in clay tablets going back over 7,000 years. Cloud computing, on the other hand, was invented in the 1990s and became an economic force starting about 15 years ago. Cloud computing is the ability to rent time on a network-based system of servers that allows us to store and process data over the internet.
Public cloud computing providers rent space on their servers to individual companies to process data, while private cloud resources are deployed within organizations or managed on their behalf. The dominant public cloud computing providers (simply called “public clouds”) in the world today are Amazon Web Services, Microsoft Azure, Google Cloud Platform and Alibaba Cloud.
Public cloud access allows businesses to move forward with new technology adoption without up-front CapEx investment. It also allows businesses to analyze more of their own operational data, which uncovers more complex operational patterns and operational risks.
Public cloud-based analysis is also enabling faster insights, to the point that real-time operational insight is becoming possible.
Better, deeper, faster operational insight enables financial professionals to make more solid business decisions moving forward, including reducing operational costs based on deeper understanding of operational fundamentals.
For example, as a financial controller, I’ve used financial analytics to create KPI reporting to produce specific metrics that we’re able to track. As a result, over the past several years, this allowed us to improve to our business operations, which included better support for our customers in addition to streamlining some of our internal processes.
In addition, we retained our customers at the same time we grew our revenue based on improved contract terms. And while we were doing all of the previous, we improved our customer satisfaction rating by 80%.
Data analytics continues to revolutionize the way we do business, and it is continually evolving as we learn more about what data can be tracked and how it can be beneficial to business owners. Financial analytics provides different views of a company’s financial data and can assist -in gaining in-depth knowledge and allow them to improve their business performance.
As more financial professionals move into the data analytics field, we gain the ability to influence data collection and analytics, which affects all aspects of businesses. This virtuous cycle is a powerful tool for finance. The more finance gets involved with organizational data analytics, the more finance can participate in strategic business decisions.
Financial professionals are not alone in leveraging new data analytics technologies. Investment analysis is defined as the process of evaluating an investment for profitability and risk, and so investment firms are now focusing on the data analytics side of the public cloud.
Institutional investors are finding that analysis of public data about public clouds themselves can be used to corroborate public cloud component and supply chain vendor claims, as well as the competitive state of the public clouds themselves.
Data analytics about public clouds enables institutional investors to mitigate their own investment risk and to provide more solid advice to their customers.
In conclusion, the financial community – both professional accountants and institutional investors – must rely on data analytics to streamline business processes and make more strategic operational decisions using cloud computing technology.
Given by the author and published on this website in 2020
G. Kapanowski - How Finance Can Destroy Company Value
Certified Lean Six Sigma Master Black Belt and Certified ASQ Bronze Lean professional is cost accountant for Moeller Manufacturing, a leading aerospace part supplier, and Lean Six Sigma Master Black Belt Lecturer at Lawrence Technological University Professional Development Center
He is on the editorial board and contributing editor for the Journal of Cost Management
Gary E. Kapanowski
Cost Accountant; Export Compliance Officer
30100 Beck Road
Wixom, Michigan 48393
Telephone: 248-960-3999 Ext. 406 (direct)
How Finance Can Destroy Company Value
In his 1989 hit “Runnin’ Down a Dream,” Tom Petty sang: “Yeah runnin’ down a dream; that never would come to me; workin’ on a mystery, goin’ wherever it leads; runnin’ down a dream.”1
According to William Levinson, there is a divergence in corporate strategy from an operating and financial reporting point of view, which leads to misallocation of the resources utilized to produce decisionmaking information.2
When an organization is focused primarily on finance-based metrics, like bank covenants, compliance with IRS or SEC regulations, and other guidance for exporting goods or services outside the country, suboptimal performance is a guaranteed result.
This article will address why this occurs and how we can prevent this from happening in our organizations......
The full article is available in the file attached below
Given by the author and published on this website in 2019