Category Archives: Finance

$441,000 — That’s What Each Incident of Fraud Costs You!

According to a recent article in Industry Week on how you could “reduce misconduct by making ethics everyone’s business”, fraud costs organizations, on average, 7% of their annual revenue. Furthermore, a single incident of fraud in the manufacturing sector costs an average of $441,000 — a number that is higher than the financial services industry and the highest of any sector with a high incidence of fraud. In today’s economic climate, that’s 7% you can’t afford to lose.

That’s why you should take aggressive methods to combat fraud, and start by setting a positive, anti-fraud, tone at the top that makes ethics everyone’s business. Take a six sigma approach and deploy an anonymous company-wide reporting mechanism that allows every employee to report potential misconduct at any time without fear of reproach. And get an outside review by a fraud expert who can help you identify where fraud is most likely to occur in your supply chain and what steps you can take to prevent it. It will likely cost you a lot less than a single incidence of fraud would cost you.

What Do You Mean You Need Cash? Your Company Is Full Of It!

I was intrigued as to what direction an article titled “Need Cash? Look Inside Your Company” would take, found in the new edition of the Harvard Business Review, as I know that most companies can find plenty of cash if they just look for it and take the appropriate action. After all, most companies are spending at least 10%, 20%, or 30% more than they need to be … and if they put the right emphasis on strategic sourcing, e-Procurement, contract management, and spend analysis … many companies could find millions without scratching the surface.

The problem is, as the article points out, that the boom years have made your average business careless with capital. But cash is king again … and if you’re not taking a hard look at your cash management strategies, you could be filing for bankruptcy instead of thriving. So where do you start? Well, if you’re in supply chain, you start with sourcing … but if you’re in finance, apparently you start by managing your working capital and freeing up the capital you have needlessly tied up in receivables and inventory. To this end, the HBR article outlined six mistakes that, if avoided, will help in this regard.

  1. Managing to the Income Statement
    Throw those profitability performance measures out the window … it’s about the balance statement. If you measure against contribution to reported profits, then purchasing will be incentivized to buy more inventory than you need to secure a discount … but inventory ties up capital and has holding costs, which will likely cost more than you’ll save from the discount!
  2. Rewarding the Sales Force for Growth Alone
    This encourages sales to book sales at any cost. They’ll grant long payment delays, insist on larger than necessary finished-goods inventories, but then be unwilling to chase down late payments.
  3. Overemphasizing Production Quality
    While quality is important, an undue emphasis can cost more than it saves. Quality Control slows down production and locks up capital in work-in-process inventory. If we’re talking food production, given the recent fiascos, undue emphasis might be justified. But if we’re talking mp3 players, attempting to reducing defects from 50 PPM to 5 PPM might cost more than it saves from just recycling the extra 45 defective products.
  4. Tying Receivables to Payables
    Generally, your customers are not your suppliers, your suppliers are not your customers, and the two are completely different financial concepts. Relative bargaining power, the nature of competition, industry structure, and switching costs will ultimately determine the terms that a company can dictate to its customers or must accept from its suppliers.
  5. Applying Current and Quick Ratios
    Although popular with bankers, who want to ensure companies have enough money to repay their loans in the event of distress, they are inappropriate for management as they encourage companies to manage according to a “death scenario”, which means they are good IF you want to go out of business.
  6. Benchmarking Competitors
    Although it might sound good to benchmark against your competitors, it tends to lead to complacency when the scoreboard indicates a company’s metrics are above what it believes to be the industry norm.

An Update on the Kiva Micro-Finance Experiment, Part II

Last September, I introduced you to Kiva, the world’s first person-to-person micro-lending initiative in a post where I posed the question Can Micro-Finance Make a Macro-Difference? after being referred to the site by a fellow hoser.

In an attempt to answer that question, I decided to conduct an experiment. Since last July, I have been making two loans a month under the hypothesis that if it works, after a year I will have enough capital in the Kiva system to help a new person every month as previous micro-loans get re-payed. To date, the doctor has made twenty $25 Kiva micro-loans (which get bundled with other micro-loans to fund loans to individuals and groups through Kiva’s micro-finance partners). The loans are:

Individual Institution Total Loan Loan Funded Disbursed Repayment Term Repaid to Date*
Gulchehra Rahimova LLC MLO Humo and Partners 1,175 June 28, 2008 July 12, 2008 12 months 67%
Din Ly CREDIT (World Relief) 250 June 28, 2008 July 12, 2008 18 months 44%
Araba Awotwe Christian Rural Aid Network (CRAN) 350 August 14, 2008 August 28, 2008 7 months 100%
Serigne Cisse UIMCEC (Christian Children’s Fund) 975 August 15, 2008 August 29, 2008 12 months 58%
Mavluda Tosheva LLC MLO Humo and Partners 450 September 1, 2008 September 15, 2008 12 months 50%
Mario Aguilar Fundacion Paraguaya 475 September 1, 2008 September 15, 2008 11 months 55%
Irene Microfinanzas PRISMA 1,200 October 11, 2008 October 25, 2008 6 months 83%
Sokhna Sene UIMCEC (Christian Children’s Fund) 300 November 1, 2008 November 15, 2008 12 months 33%
Essoneya Tchindo WAGES 300 November 1, 2008 November 15, 2008 12 months 33%
Guillermo Microfinanzas PRISMA 325 November 1, 2008 November 15, 2008 10 months 40%
Olinda Microfinanzas PRISMA 325 November 27, 2008 October 31, 2008 6 months 67%
Sron Chea Group AMK 200 November 27, 2008 October 28, 2008 4 months 100%
Kayi Lawson Microfund Togo 1,175 January 2, 2009 November 17, 2008 18 months 11%
Abdulhokim Azimov LLC MLO Humo and Partners 600 January 3, 2009 January 17, 2009 10 months 20%
Feliciana Llano Ramirez Manuela Ramos / CrediMUJER 475 Feb 4, 2009 Jan 15, 2009 5 months 67%
Atta Ofori Sinapi Aba Trust (SAT) 525 Feb 4, 2009 Jan 26, 2009 10 months 14%
Moeun Sileng CREDIT, a partner of World Relief 1200 Mar 1, 2009 Feb 12, 2009 21 months 6%
Mohammad Ameen s.a.l. 1200 Mar 1, 2009 Feb 5, 2009 15 months 8%
Daniel Adu Sinapi Aba Trust (SAT) 725 Apr 5, 2009 Mar 26, 2009 8 months 0%
Adetokunbo Fajuke Lift Above Poverty Organization (LAPO) 500 Apr 6, 2009 Apr 20, 2009 10 months 0%
Averages 636 11 months

Since my last update in January, where I presented an interim verdict that Kiva appeared to be great, based on the fact that all loans over 3 months old had partial repayments, I’m happy to say that Kiva beat my expectations. I expected that it would take 13 or 14 months to reach the point where the repayments coming in would be enough to guarantee at least one new (minimum) loan of $25 every month, and preferably two, when, in fact, it only took 10 months! As of this month, the cumulative repayments coming in for the month are enough to make two new $25 loans next month.

Conclusion? While the site continues to disclaim (in the footer of every page) that lending to the working poor through Kiva involves risk of principal loss, Kiva is working great. And in this economy, it’s less risky than investing in the stock market and mortgage funds, especially since an investment in Kiva last year would have resulted in your principal being returned to you, while those of us with market-based investments (stocks, mutual funds, 401Ks, RRSPs, etc.) are finding them (considerably) underwater at this time.

Thus, I would still encourage you, if you’re still lucky enough to have any discretionary funds left, to take part of them and try lending through the Kiva platform. Considering that you can start for $25, or the cost of one good bottle of wine (at the liquor store and not your local 300% mark-up restaurant), it’s an endeavor that the vast majority of us should be able to afford. And if even half of the 1.2B people in the developed world made even one loan a year, think of the sustainable difference it could make. That’s something worth aiming for. And if you do lend, remember to tell them that jeff <at> hosernews <dot> ca sent you (because one should give credit where credit is due). (And if you’re a fellow hoser, you can even consider joining his team.)

And remember, there is a supply chain lesson here for all of us. If a good supplier is in trouble in these hard financial times, key customers can band together to keep it financially solvent until times improve through faster payments, guaranteed orders, and low-interest loans. And, in addition to the good feeling these customers will get from knowing they did right, they can also secure long-term capacity from a strategic supplier. Let’s face it — most business people want to do the right thing when given the choice, and many will be quite happy to sign a long term contract or guarantee if you help to bail them out. This means that if you stick by a good supplier when it’s having a bad day, it’ll stick by you through thick and thin.

*As of April 22, 2009

Empirical Proof that Layoffs Kill Profits

As summarized in this Strategy + Business Research Brief on a Harvard Business School Working Paper, laying off store employees is a tactic retailers use to cut costs but it’s likely to have a negative impact on the bottom line. The author spent four years studying a national retail firm with more than 260 stores and found a direct link between staffing levels and profitability.

Specifically, the author found that when a store maintained too few employees, which were overworked, conformance quality — which measures how well employees follow specific processes — suffered and this led to higher levels of customer dissatisfaction and lower profitability. More importantly, it only took a slight increase in conformance quality to generate a 4% increase in margins. Considering that some retailers, especially in grocery, operate on razor thin margins that are less than 10%, an improvement in conformance quality alone can result in a 50% to 100% improvement in margins.

So again, one has to ask, given the risks associated with cutting your talent (productivity, morale, quality, revenue, profits, and lawsuits), the benefits of keeping your talent, and the fact that there’s always better savings opportunities to be had with process transformation and strategic supply chain initiatives, is it really worth it?

Winning Support from the CFO for Your Supply Chain Project

You can win over the CPO, the CIO, the COO and even the CEO, but if you don’t win over the CFO, chances are your project, even if it has an expected 10x ROI, won’t go anywhere if the CFO won’t cut the check. You need the support of the CFO, and fortunately for you, it’s not as hard to get as you think it might be if you do your job and demonstrate how the project helps the CFO do his.

Remembering that it is the CFO’s job to not only control cash-flow and monitor the financial health of the company, but to serve the shareholders, you should have no problem winning over the CFO over if you can clearly demonstrate that your project will improve the financial health of the company AND serve the needs of the shareholders in a reasonable time-frame.

But how do you do this? As I described in The Quest for Purchasing Fire on the e-Sourcing Wiki, you clearly define the value proposition, build the business case, create a great presentation, and, most importantly, address the concerns of the CFO.

What are the concerns of the CFO that you can address? As outlined in a recent article in i2’s Supply Chain Leader on “linking the CFO to Supply Chain Execution”, your well thought-out supply chain project should reduce the company’s cash-to-cash cycle times, reduce the company’s risk profile, support profitable growth, and deliver predictable revenue … big concerns of every CFO in today’s economy.

  • Reducing cash-to-cash cycle times
    If you increase your perfect order rate, you’ll optimize cash collection and shorten cash-to-cash cycle times. A number of projects will increase perfect-order rates. They include:

    • e-Procurement
    • Transportation Management Systems (TMS) and Warehouse Management Systems (LMS)
    • Just-In-Time (JIT) and Vendor Managed Inventory (VMI) initiatives
  • Reducing the company’s risk profile
    If your project addresses supply risk, currency risk, or total landed cost risk, it will reduce your company’s risk profile, and total cost.

    • Better inventory management will reduce supply risk and decrease costs as less shipments will need to be expedited
    • Negotiating contracts in relatively stable currencies, like the Euro, or your home country currency can reduce currency risk.
    • Implementing a global trade management system to help you insure compliance reduces the risks of customs delays, fines, and seizures.
  • Achieving profitable growth
    If you can calculate the top-line and bottom-line returns of your project, you can win the CFO over more quickly.

    • E-procurement systems will instantly eliminate high manual invoice processing costs, which are between $30 and $90 in an average organization
    • e-Sourcing platforms with decision optimization will cut at least 10% off your total spend, and keep it off
    • indexed contracts will insure that your price increases never rise more than raw material costs and, more importantly, insure that you see price decreases when commodity indexes drop
  • Deliver predictable revenue
    A project that you can repeat month after month, such as the application of e-Sourcing to category after category, or spend-analysis on different areas of the business which looks at the data in different ways, can deliver long-term predictable revenue streams. If you identify projects that keep on giving, your CFO will be very happy.