On the recommendation of a colleague, I saw the movie “Jerry Maguire” starring Tom Cruise. Throughout the movie, a key character emphatically used the mantra, “Show me the money!”
In the movie, “show me the money” is used to convey urgency and enthusiasm in attempting to find a big financial payoff. As users and dependers on data hidden in the technology of your organization, we can also apply this mantra.
We will create what should be your business refrain to your information technology people and vendors: “Give me the tools that show me the money (SMTM).”
The move from a manual or archaic accounting record-keeping system to a system providing timely information on which to base decisions is a start in the process of implementing SMTM thinking. But technology can provide more for understanding and documenting the nature of your business.
To explain, let me give two examples. Last week, while talking to a small manufacturer, I asked him if he knew the direct cost of each product. His frank answer “No” surprised me. We discussed how easy capturing some of that data for analysis using basic automation tools can be.
For his business size and current situation, a large investment in a true manufacturing information system may be inappropriate, but the data captured even with a simple system will help him make better decisions and “see the money.”
Lest you think that this problem does not apply to professional services organizations, I have come across a second example. Simply put, many law firms and some medical practices are not capturing accrual data for reporting (the ideal means of looking at data for management decision-making) for internal reliance purposes.
If you aren’t properly informed, you can’t adequately position for the future.
One way to reinvigorate a business is to really understand business processes and the costs associated with them. A new lexicon has become popular as a result that makes basic cost-accounting notions universal. Those words include benchmarking, activity-based costing (ABC), activity-based costing and management (ABC/M), and time studies.
While each of these words represents a discipline that individually or together can fill thick books, the basic premise is that activities in a process have costs. Those costs reflect resources invested in the process, and those activities and resources may be used in inefficient or wasteful ways.
Knowing and following a process, and quantifying activities and resources, have been made easier with many technological innovations including off-the-shelf software. Some of that software is useful in activity-based costing.
What is ABC? It is a detail- and data-intensive introspection of the way your business behaves. It examines the following aspects of departmental and organizational activities: why each is performed; when, in what order, and under what circumstances each is performed; how often each is performed; for whom is it performed; what resources are used or consumed in performing each activity; and what factors determine that activity.
The combination of these factors determines the ultimate profitability of each activity, and of your business in any industry. Because this requires detailed information, an implementation of ABC used to be an impractical exercise.
Contemporary information system tools available in business software are changing all that. Software will allow for tracking many indirect or hidden costs of activities.
In any industry, people-time is a critical cost. And time is money. For service industries, this is apparent. An engineer cannot bill an hourly job without keeping track of hours. Therefore, time and billing software has become popular.
Yet every business can invest people-time in customer relationships, product development and marketing, quality control of the goods or services sold and more. Do you really know if your large, but demanding customer is making or losing you money when you include the costs of sales and customer service? What about actual people-activity with goods in the warehouse or on the shop floor do you know how much time is being spent vs. a standard? How do you know if a technician is quicker and more competent at one type of job than another?
Simple timesheet-like software for professionals can capture time by project, customer, department, and/or product for even salaried, remote location, and on-the-road employees. This type of software can then automatically link with payroll and accounting systems to eliminate further data entry. Still, the data is available for providing information.
There are many hidden costs that are frequently overlooked or not convenient during analysis of the profitability of a product or a customer. For example, freight-in costs are often not recognized as a specific cost of the item shipped in. While these costs are considered “overhead,” they have direct relationships to specific customer and product profitability.
Another example involves the marketing efforts. Entertaining customers, while a necessary component of doing business, is a cost of that specific business. Software that helps people track time can also track people-driven expenses and apply them appropriately.
With yet other costs, software can allow for the creation of “kits” that will attach the cost with the item or customer. For example, packaging, a small but cumulatively significant expense, can be applied to a sale.
When you use the software, you still need to know what choices to make. Since every business has finite resources, misuse of each resource has a cost. If you can sell a widget that could ideally cost $100, but are extending the activity for “procedural reasons” to cost $200, you have lost $100 in profit. Thus, you must use the analysis provided by the software to identify opportunities to streamline and reduce the bureaucratic clutter of your processes.
Remember that by using the knowledge provided by today’s software, you can make better business decisions and really know who your best customers are and how best yet most inexpensively to service them.
Chaim Yudkowsky, CPA, is director of management consulting services at Grabush, Newman & Co., a Baltimore-based accounting and management consulting firm.