Business Growth Strategies

Overhead Allocations: Rising Costs Require a Fresh, Disciplined Mindset

From utilities and interest expense to executive salaries and insurance, many overhead costs have skyrocketed over the last few years. Some companies have responded by passing along the increases to customers through higher prices of goods and services. Is this strategy right for your business? Before implementing price increases, it’s important to understand how to allocate indirect costs to your products. Proper cost allocation is essential to evaluating product and service line profitability and, in turn, making informed pricing decisions.

Defining overhead

Overhead costs are a part of every business. These accounts frequently serve as catch-alls for any expense that can’t be directly allocated to production, including:

  • Equipment maintenance and depreciation,
  • Rent and building maintenance,
  • Administrative and executive salaries,
  • Interest expense,
  • Taxes,
  • Insurance, and
  • Utilities.

Generally, indirect costs of production are fixed over the short run, meaning they won’t change appreciably whether production increases or diminishes.

Calculating overhead rates

The challenge comes in deciding how to allocate these costs to products using an overhead rate. The rate is typically determined by dividing estimated overhead expenses by estimated totals in the allocation base (for example, direct labor hours) for a future time period. Then, you multiply the rate by the actual number of direct labor hours for each product (or batch of products) to establish the amount of overhead that should be applied.

In some companies, the rate is applied companywide, across all products. This might be appropriate for organizations that make single, standard products over long periods of time. But, if your product mix is more complex and customized, you may use multiple overhead rates to allocate costs more accurately. If one department is machine-intensive and another is labor-intensive, for example, multiple rates may be appropriate.

Handling variances

There’s one problem with accounting for overhead costs: Variances from actual costs are almost certain. There are likely to be more variances if you use a simple companywide overhead rate, but even the most carefully thought-out multiple rates won’t always be 100% accurate.

The result is large accounts that many managers don’t understand and that require constant adjustment. This situation creates opportunities for errors — and for dishonest people to commit fraud. Fortunately, you can reduce the chance of overhead anomalies with strong internal control procedures, such as:

  • Conducting independent reviews of all adjustments to overhead and inventory accounts,
  • Studying significant overhead adjustments over different periods of time to spot anomalies,
  • Discussing complaints about high product costs with nonaccounting managers, and
  • Evaluating your existing overhead allocation and making adjustments as necessary.

Allocating costs more accurately won’t guarantee that you make a profit. To do that, you have to make prudent pricing decisions — based on the production costs and market conditions — and then sell what you produce.

For more information 

Cost accounting can be complex, and indirect overhead costs can be difficult to trace. Our accounting professionals can help you apply a systematic approach to estimating meaningful overhead rates and adjusting them when necessary. We can also evaluate pricing decisions and suggest cost cutting measures to combat rising costs.

© 2023

    Business Growth Strategies

Rolling Forecasts Provide Flexibility in Uncertain Times

Forecasting how your company is likely to perform over the next year can be challenging, especially when it’s unclear where the markets are heading. But accurate forecasts are critical when managing a business. For example, they may be used to order inventory, hire additional workers, apply for loans and credit lines, and evaluate investment alternatives.
As the COVID-19 pandemic persists, many companies have responded to these challenges by switching from static forecasts to rolling ones. Here’s how the transition can make the forecasting process more efficient and accurate.

Static vs. Rolling Forecasts

Traditional static (or fixed) forecasts are created at the start of the fiscal year — often based on the company’s historical financial statements — and then used as a guide for the following year. This approach works well for established organizations that experience relatively minor changes year to year. But for most businesses, static forecasts quickly become outdated, because they don’t allow adjustments throughout the year for variances that inevitably take place. The traditional approach is based on inflexible assumptions that must be completely recast if conditions change.

Managers who use static forecasts typically see the forecasting process as a once-a-year exercise. Many fail to compare expected to actual performance until year end. And those who notice when actual results fall short may fail to revise their annual goals — instead hoping to make up for the shortcoming before year end, leading to counterproductive behaviors.
For example, to make up for missed sales goals through the year, salespeople may resort to aggressive discounting at year end, which can erode profits. In other situations, after a particularly successful month, workers may decide to slack off in the subsequent month, because they’re ahead of schedule.

Conversely, rolling forecasts require regular updates based on what’s actually happening in your business and marketplace. This approach makes the forecasting process more adaptable, accurate and meaningful.

How it Works

Rather than leaving a budget in place for the year, companies with rolling budgets set times throughout the year to readjust the numbers. For example, you might budget four quarters ahead. At the end of each quarter, you would update the budgets for the next three quarters and add a new fourth quarter.
The rolling approach encourages management to take an agile, forward-looking perspective. It facilitates timely responses to emerging trends, whether on the revenue side, the expense side or both. It also calls for regular budget monitoring and real-time review. These steps can help management catch significant variances and make appropriate adjustments.

On a Roll

Uncertainty abounds today. Some businesses have seen a major decline in revenue during the pandemic but are hopeful that conditions will improve. Others have revised their strategies to take advantage of emerging opportunities. Many are struggling to manage supply chain issues, labor shortages and rising costs that could outlast the pandemic. Regardless of which challenges you’re facing, rolling forecasts can be a helpful management tool. Contact us for help implementing a more agile approach to forecasting for 2022.

© 2021

    Business Growth Strategies

Profitable Growth, Take 2: Gaining Measurable Results from a Waste Audit

An efficient route to profitable growth for many businesses lies in a waste audit. As I shared in my previous article, profitable growth is achieved by eliminating waste and minimizing overspending within an organization. We covered the helpful DOWNTIME list of eight common types of waste and discussed why it’s worth pursuing both top-line and bottom-line growth to achieve long-term business health.

Below, I explore a case study of a successful waste audit and share some helpful strategies for seeing results from your company’s first one.

A Waste Audit In Practice

A waste audit sounds good in theory, but what about in practice? Working with a professional service company as their business advisors, we ran a waste audit and realized they were spending a considerable amount every year on subcontractors.

While hiring the subcontractors made the managers’ lives easier, it also cost them a fortune (this fell into the “extra processing” waste category, in case you were curious). We worked with them to help improve their operations. We found that many full-time employees were being overscheduled to ensure project completion, but at the cost of efficient time management. In this case, properly budgeting the project and scheduling resources freed up hours that could be used on other projects.

Proper utilization of the company’s existing resources decreased the need to hire subcontractors. The company initially had three subcontractors. Now, two years later, they only have one. This small change saved the company thousands of dollars annually, and therefore increased profitability.

One subtle reduction in waste created thousands of dollars in profit without having to increase revenue. That is the art of waste auditing. It’s not always about massive sweeping changes. Sometimes it’s about smaller, attainable adjustments that can make a significant impact.

The Waste Audit Tool

When we’re conducting a waste audit with our clients, we use a waste audit tool, shown below. In essence, this involves creating a waste statement for one year. List each waste and how much you estimate it costs your company annually. If you don’t know the exact number, you can simply rank the dollar amount from low, medium, to high.

For each item you identify as potential waste, rank the “ease of removal” by considering how easy it is to eliminate that waste from a scale of -5 to +5 (+5 being the easiest). This method helps to identify two things:

  1. Which wastes are costing the most money?
  2. Which wastes are the most manageable problems to fix?

We’ve been doing this a while, and we’ve found that the best approach isn’t always to handle the most expensive wastes first. Instead, start by tackling the wastes that are easier to fix. Organizational behavior changes are tough. You don’t want to demotivate your staff with a challenging, disruptive change that has a slim chance of success.

After a few successes, then tackle the larger projects. Going for the lower-hanging fruit is a fantastic way to ease into profitable growth.

Unsure how to start implementing your waste audit findings? Here’s a quick breakdown of our process:

Become More Profitable Today

As business advisors and CPAs, we’re experts at waste audits—as a complement to our assurance services. If you want to determine whether your company is suffering from unnecessary waste and work on increasing profit, we would love to speak with you to learn more about your business and identify areas where our business advisors could potentially offer solutions.

    Business Growth Strategies

Conducting a Waste Audit for Profitable Growth

Most business owners look at profitability as a one-way street, as a simple equation where more revenue equals more profitability. While there’s some truth to that, there’s much more to consider.

As business advisors and CPAs, at Haskell & White we spend our time buried in profit and loss statements. We’ve found that often, the key to increasing profitability is more about decreasing waste than it is about top-line growth.

Stick with me on this one. There’s merit to increasing revenue. It’s the most straightforward way to drive growth. More cash flow at the top trickles down and creates more money at the bottom. However, to create profitable growth, it’s essential to look at the entire picture, not just the incoming revenue.

Profitable Growth vs. Top-Line Growth

Many business owners do a great job at landing new clients. Their lead generation pipeline is solid, and their sales teams are talented. But, every dollar of revenue a company earns has to make its way through the income statement. You have to buy equipment, pay employees, purchase inventory, and more.

The result? More revenue creates more work for the business, and it doesn’t often result in much money in the business owner’s pocket. This is where the difference lies: Top-line growth puts an emphasis on increasing revenue. Profitable growth focuses on margins, decreasing waste, and creating sustainable long-term growth.

Both are important. But, as business advisors, we see our clients consistently losing thousands of dollars due to unnecessary waste. This disconnect is why we advise all our clients who are looking to increase profitability to start with a waste audit.

What Constitutes Waste?

A waste audit involves looking at your company’s profit and loss statement and finding areas where you’re spending more money than necessary. First, let’s talk about waste.

What constitutes waste? As business advisors (in addition to our assurance and tax planning services), we like to use Toyota’s eight most prevalent wastes as a guideline. Though originally developed for Toyota’s production system, we’ve found that these types of waste apply to almost every business.

You simply need to remember the acronym DOWNTIME, which represents the following:

  • Defects – Ranging from poor equipment quality to inadequate training, this applies to essentially any defect in your system that results in having to scrap or re-do work.
  • Overproduction – Situations where you have too much product or are spending too much time on low-paying clients. Paying too much overtime also falls into this category.
  • Waiting – Essentially, the money lost due to waiting: waiting on client responses, credit approvals, or simply being unable to finish tasks in a timely manner.
  • UNused Talent – Improper task delegation or not utilizing your employees’ talents appropriately.
  • Transportation – Transportation costs like freight, travel, company vehicle usage costs, and transportation to meetings, or even paying for overnight shipping when standard shipping would suffice.
  • Inventory – Having too much product on hand, too many SKUs, outdated products, or continuing to buy products that aren’t selling. Packaging costs and write-offs also apply.
  • Motion – Related to efficiency in movement and how your systems affect that efficiency—including your office layout, the location of your tools, required travel, and more. Think about the daily processes and how habitual motions detract from the bottom dollar.
  • Extra Processing – Using unnecessary resources: the wrong tools, the wrong people for the job, or too many people working on the same project. This can also include paper waste or excessive documentation.

Each company’s application of these eight wastes varies dramatically. If you’re a manufacturing company, defects are typically associated with equipment. If you’re a retailer, defects may be associated with bad products. Whatever your industry, it’s simple to apply these eight areas of waste to your organization and begin seeing where you might be hemorrhaging potential profit.

There’s a lot more to get into, which is why I’ll be dedicating another article sharing a case study of a successful waste audit and my recommendations for simplifying your first waste audit to start seeing results faster. If your curiosity is piqued and you’re interested in learning more about how we can support your company’s efforts at profitable growth, feel free to get in touch for a complimentary consultation.
    Business Growth Strategies

GPS Diagnostic: Identify Your Top Factors to Maximize Growth and Profit in Your Business

Whether you’re interested in exit planning or discovering opportunities for growing your profits, planning is an essential part of any business. As the adage goes, failing to plan is planning to fail.

When you think about tax planning or public accounting services, business advisory doesn’t immediately come to mind. The role a CPA plays in your business can be that of a historian, producing financial statements and tax returns that ensure you are in compliance and documenting your business history. Here at Haskell & White, we’re a little different. We believe in helping our clients do more.

We like to take things a step further by helping you identify ways to increase revenue, maximize profits, and achieve long-term business goals. Understanding your business and the financials puts us in an excellent position to advise you on taking your business to the next level, protecting what you’ve built, or maximizing your place in the market. That’s why we utilize the GPS Business Diagnostic to focus on what matters. GPS stands for Growth & Profit Solutions, and that’s exactly what this tool provides.

What’s Working and What Isn’t?

When you’re in the thick of operations, it’s difficult to see the forest for the trees. If you aren’t hitting your profit goals, it’s likely that some underlying problems are stalling your success. But how do you differentiate issues from opportunities? How can you tell what’s working and what isn’t?

Our GPS Business Diagnostic is a check-up for your business. Similar to the GPS on your phone or in your car, this tool works like a roadmap for success.

It’s like getting a bird’s eye view of what’s going on inside of your organization. By filling out a short, five-minute questionnaire, you can quickly identify your top three areas of high performance and your top three areas needing improvement. Once these areas are identified, we assist in building strategic plans to capitalize on your strengths and reduce the effects of any weaknesses.

This analysis goes beyond routine public accounting services and instead looks at ten holistic success factors, which include:

  1. People
  2. Systems
  3. Implementation
  4. Strategy
  5. Profit
  6. Leadership
  7. Innovation
  8. Marketing
  9. Sales
  10. Technology

Once completed, you instantly get a visual report, including line bar presentations of all ten areas, color-coded to represent how you’re performing in them. Green bars represent your strengths, while red bars represent your weaknesses. Yellow bars are the areas in between.

How Public Accounting Services Can Support Growth and Profit

From Gallup’s CliftonStrengths specialists to Tim Ferris’s 4-hour workweek, many experts agree that the real key to success lies in finding your strengths and capitalizing on them. For your weaker areas, it’s about eliminating the time you spend on them by automating processes or finding simple solutions for improvement.

As a public accounting firm, sometimes we speak with company leaders who want to increase the top line revenue number to improve their profit percentage, only to realize after using our GPS tool that concentrating on efficiency and removing “waste” in the business will be a better approach. We discover that they’re spending capital inefficiently, making it appear that they aren’t hitting their bottom line. In reality, it’s an operations issue versus a sales issue. Finding opportunities to eliminate excess spending and maximize cost efficiencies can make a huge difference for these companies.

Other times, we’ll find that companies aren’t pricing their products effectively. Their margins are too small and they’re leaving money on the table. In other instances, we find that there’s a talent issue. People are in the wrong positions or critical positions are missing. For example, a company may be poised for growth, but without a key operations leader in place, incoming demand may not be met.

The ten areas listed above represent the ten barriers to business success. If you’re failing in any of these facets, you’re limiting your potential for growth.

Ready to Try the GPS Business Diagnostic?

Whether you’re experiencing growing pains, failing to hit your profit goals, or you want to get a sense of where your business stands, give this diagnostic a try. It’s completely free, and it only takes about five minutes to complete. It’s simple, straightforward, and perfect for a middle-market company.

A quick tip: we recommend having multiple members of your management team take the assessment for the most evident results. Getting perspectives from different stakeholders allows you to see which strengths and weaknesses overlap. Our favorite feature of this resource is combining multiple reports to see if the leaders of an organization are in sync.

If you’re looking for more insight after seeing your results, we offer a one-hour consultation to review the report.

Why not work with a public accounting firm that not only ensures you are in compliance but also focuses on your future? Our GPS Business Diagnostic is just one resource we utilize to help chart your future. Give it a try; the results might surprise you.
    Business Growth Strategies

Prepare for Success with a Change Success Diagnostic

Is your company preparing for a big change? We’re the first to admit that corporate change initiatives can be daunting.

In fact, research indicates that 70% of all change initiatives fail. Whether you’re integrating a new software, in the middle of a merger, or hiring new staff, change is especially challenging if you haven’t prepared for it. The trial-and-error approach often leads to unnecessary costs, wasted time, and a frustrated and demotivated team. When you’re looking at making a change in a company, there are three key items you need to assess:

  • How ready is my organization for change?
  • How capable are we of changing?
  • How might our current belief systems affect the change?

These fundamental questions help determine if your change initiative will be successful. Utilizing our Change Success Diagnostic helps you identify areas to improve before taking on a change initiative. Identifying in advance where you might need more support improves your opportunity for success.

Our business advisory services focus on recognizing your goals for the company’s future to help you achieve sustained success. Here at Haskell & White, an Orange County CPA firm, we’re passionate about helping our clients grow and plan for the long term. Part of that planning involves preparing for significant changes in your business.

What Does the Diagnostic Do?

The Change Success Diagnostic is based on doctoral research that investigated companies around the world which handled change initiatives with great success. The research identified three areas critical for enacting change and how to measure their impact. As part of our business advisory services, we’ve found that using this diagnostic to assess how prepared a company is for a given change is extremely helpful and prevents wasted efforts. That way, they can see which areas need improvement before diving headfirst into something new.

There are three primary areas and ten sub-factors that play into a company’s ability to be successful in adapting to change, including:

  1. Readiness
    1. Leadership Support
    2. Need for Change
    3. WIIFM (What’s In It for Me?)
    4. Change Process
    5. Confidence
  2. Capability
    1. People Capability
    2. Organizational Capability
  3. Belief
    1. Significant Others
    2. Attitude
    3. Perceived Difficulty

After completing a quick questionnaire, our diagnostic provides you with a visual and quantified representation of how ready your organization is for change. Complete with percentages and breakdowns for each area, this diagnostic has helped our clients avoid headaches, wasted money, and time.

Why You Should Give It a Try

Knowing your strengths and weak points when it comes to change preparedness helps your organization adapt in order to achieve a more successful outcome of new initiatives. We recommend having several people from your company complete the diagnostic to gain a more balanced perspective. Doing so allows deeper insights into potential problem spots, which are often hidden or not discussed.

For instance, if someone from your organization completes the assessment and scores low in perceived difficulty, meaning they think that the change will be difficult, this may spark a conversation among leadership to understand why. Perhaps staff members are worried about implementing new tech because the existing IT department is lacking. You could address this perception of difficulty by planning to hire additional tech support for the implementation.

We’re not the typical Orange County CPA Firm offering business advisory services without practicing what we preach, either. We use (and continue to use) this resource within our own organization when we implement new initiatives. We’ve found it to be an essential tool in our business advisory services toolkit.

Leveraging the Change Success Diagnostic (Even if You Aren’t Looking for Business Advisory Services)

Planning for a substantial change? Or is one being forced upon your competitors? Try this diagnostic out first. It’s free, and it only takes a few minutes to complete. Once you finish, you’ll instantly get a visual report representing how prepared you are for a change initiative in your company.

Don’t be too concerned if your results come in low: most people who take this assessment score around 40-50% (out of 100% prepared). Also, know that we offer a wide range of business advisory services and solutions, so if you aren’t prepared, we’re here to help get you there.

Want to see if you’re actually ready for that upcoming change initiative: new POS system, merger, or change in management? Give the diagnostic a try now.
    Business Growth Strategies

7 Wasteful Habits That Stifle Productivity (and Profitability)

If efficiency is one of the primary drivers of profitability, why do so many businesses waste assets—physical, financial, and human—with such regularity? Solving this age-old problem is the basis of “lean production,” a modern offshoot of the Toyota Production System (TPS) which was the management/production efficiency philosophy made famous by Toyota Motor Corporation. Lean production aims to identify and focus on what adds value to your organization by reducing that which does not.

Even if your organization provides services instead of producing durable goods, inefficiencies can damage your output, slow your response time, and ultimately take a toll on your bottom line. Here are the seven types of waste identified by lean production and how to eliminate each.

Wasteful Habit #1: Overproduction

Producing an abundance of units to meet perceived customer needs results in overproduction that drains resources without providing gains. Avoid producing “just in case” inventories and focus your efforts on producing the right quantity of products “just in time.”

Wasteful Habit #2: Delays & Waiting

The old adage still holds true: time is money. On a stand-alone basis, slowdowns or delays may seem insignificant. However, over time they will add up. Examine all areas of “flow” in your organization: communication, operations, material re-supplying, order fulfillment, etc. Identify aspects of your methods where the flow is stalled and adjust your process ASAP. If you have a hard time distinguishing bottlenecks, an outside business advisor with an independent perspective can help you reveal opportunities for improvement.

Wasteful Habit #3: Inefficient Transportation

Moving inventory—or sales teams, or conference supplies, or any other mobile aspect of your business—in a last-minute or ad hoc manner piles on costs that sting doubly because they could have been avoided. Proper planning and clear guidelines for travel and expense reimbursement trim unnecessary transportation costs.

Wasteful Habit #4: Inappropriate Processing

Whether it’s wrenches for assembling widgets or your online collaboration software, using the wrong tools for the job not only wastes money, it stifles efficiency. Invest in proper tools and training but avoid expensive high-precision equipment or processes where simpler methodologies can achieve an acceptable result.

Wasteful Habit #5: Holding Excess Inventory

A close cousin of overproduction and waiting, this wasteful habit requires the use of valuable resources, including storage fees and precious attention from your staff. Audit your inventory (in service-based businesses, this includes offerings that are not core moneymakers but occupy your staff’s time) and trim the “inventory” that doesn’t serve your organization.

Wasteful Habit #6: Unnecessary Motion

The physical setup of your workplace can drain efficiency and productivity. Unnecessary bending, reaching, lifting, walking, locking/unlocking, and keying in/out distract employees from the task at hand. Invest in ergonomic upgrades to reduce these extra steps and make it easier for staff to operate at their best.

Wasteful Habit #7: Letting Defects Slide

Bad products or sub-par service are the very definitions of “waste.” Product returns and service complaints set your staff back to square one with incurred costs that are unrecoverable. By implementing checks and balances throughout your operations and production, you can catch mistakes before they make it out the door.

Don’t be afraid to take a closer look

Every business incurs waste. Some are easy to spot, and some require much deeper digging. To identify areas where efficiency is weakening, conduct a process called a ‘waste audit’. Using the seven areas above as a guide, task internal teams or an independent business advisor with reviewing business processes for waste. Before getting started in earnest, devote time to developing key performance indicators (KPIs) to set goals for the teams and establish the cost/benefit milestones to be evaluated.

Be sure to keep the waste audit process itself lean and mean. Prioritize your waste audit and removal plan to tackle the most critical issues first. Start with the most apparent waste-trimming opportunities and work your way up to more complex issues. Take care not to overburden teams with too many members and be sure not to lose momentum with a too-long timeline.

An ongoing process

Repeat and refine your audit process regularly to root out the sources of waste and implement attainable changes that prevent its return. Left unmonitored, it’s surprisingly easy for old wasteful habits to creep back into a business.

During good times where profits feel comfortable, identifying waste in your organization may not be a top priority. However, one unexpected economic downturn can leave you scrambling to immediately ‘cut costs.’ It’s a tough pill to swallow if many of these wasteful expenses could have been trimmed long ago.

Are you ready to eliminate waste and tighten your operations? Haskell & White’s experienced business advisors can help your organization find ways to be more productive and profitable.