Expense Planning: Understanding the Sensibility of Cash

Expense Planning: Understanding the Sensibility of

CashJosh Tabin & Ted Leitch

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 AccountingProfessionals

Operations and HRProfessionals

IT and Technology Professionals

C-Suite Executives

Technology

System Implementation

Operational Assessment

Project and Program Management

Business and Technology Integration

Strategy Development

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 Directorvcfo Houston

[email protected]

© 2015 vcfo | confidential and proprietary

Ted Leitch

DirectorExpense Reduction Analysts

[email protected]

5

Today’s Moderator


Mike Wilfley

Executive Vice Presidentvcfo

[email protected]

6

Agenda

Frameworks for Expense Planning

Expense Planning Challenges & Opportunities

Q&A


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


8

Budgeting in Context


9

Expense Planning ModelsA Comparison


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.


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?


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


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 proprietary

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


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.


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.


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


Poll Question 3

18

Hidden Cash Flow: The Opportunity


19

How is That Possible?


20

Procurement Best Practices10 Common Misconceptions


ONESuppliers give similar pricing to similar clients and customers

01 TWOYour strategy and expertise in purchasing in one cost category will produce similar results in another

02

THREENational pricing agreements are always better than local or regional agreements with the same supplier

03 FOURSupplier loyalty translates to best pricing and service

04

21



FIVEMore volume always gets you a better deal

05 SIXGetting three bids will get you the best price

06

SEVENYou’re asking the right questions in your RFPs

07 EIGHTGroup purchasing will always get you the lowest cost

08

22



NINELower price means lower quality and service

09

TENLowest price is the same as lowest cost

10

IS YOUR ORGANIZATION

LIMITEDBY SOME OF

THESE

BELIEFS?

23

You Can Recover More Cash Flow

Top 10 Best Practices in the Path to Exceptional


GOOD

BETTER

GREAT

EXCEPTIONAL

24

Recover More Cash FlowThe Path to Exceptional: Getting Started


01

COMMITDevelop a strategy and plan

02

ANALYZEAnalyze your actual purchasing history

25

Recover More Cash FlowThe Path to Exceptional: Understand Yourself


03

DEFINE QUALITATIVE NEEDSUnderstand the qualitative requirements for each cost category. It’s NOT all about price.

04UNDERSTAND YOUR ASSUMPTIONSMany 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 FlowThe Path to Exceptional: Understand Suppliers


05SUPPLIERS & THEIR INDUSTRIESUnderstand 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 FlowThe Path to Exceptional: Re-evaluate


06

RE-EVALUATERe-evaluate your current supplier relationships with these new insights 07

GO TO MARKETGo to market with written bids and proper frequency, and ask the right questions

28

Recover More Cash FlowThe Path to Exceptional: Structure the Deal


08

NEGOTIATENegotiate 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, MONITORImplement 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 FlowThe Path to Exceptional: Maintain It


10

CHANGE THE CULTUREEmbed 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


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.


32

Q&A


Thank youWe 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

Expense Planning: Understanding the Sensibility of Cash

Economy & Finance

Transcript of Expense Planning: Understanding the Sensibility of Cash