SPECIAL REPORT ACCOUNTING

Accountingtreasure huntUnearthingmoneymakinggennsis often just a caseof exploring yourcompany's financialstatementsBY LESLIE STEVENS-HUFFMAN | Ô CEOINTERVIEW@SBNONLINE.COM

Business leaders today don't need to be big data gurusto discover new ways to boost revenue and earningsas long as they understand the basic fundamentals

of data analysis and have a few minutes to spare. Analyzingyour financial statements can reveal a bounty of insightfultrends and potential moneymaking opportunities thatwarrant and inspire a journey into the details.

Executives tend to discount the strategic valueof traditional accounting reports like financialstatements because they recap prior activity. But whencomplemented by operational measures, balancedscorecards and strategic performance measurementsystems, valuable results may be found.

A dive into financial statements can create acompetitive advantage by helping executives proactivelyidentify trends and even predict future demand forproducts and services, says Kristy Towry, associateprofessor of accounting for the Goizueta BusinessSchool at Emory University.

"Consultants have traditionally used accounting datato make agile, first-mover decisions that are crucial toadvancing and sustaining growth," says Jeff Thomson,CMA, president and CEO of the Institute of ManagementAccountants. "Executives can follow suit as long as theyknow where to look and understand how to analyze data."

Explore your income statementEven if revenue is growing, a dive into your incomestatements and its supporting data can help you

"Consultants have traditionallyused accounting data to makeagile, first-mover decisions thatare crucial to advancing andsustaining growth."

-JEFFTHOMSON, CMA, PRESIDENT AND CEO,

INSTITUTE OF MANAGEMENT ACCOUNTANTS

capitalize on emerging opportunitiesor head off a looming sales decline.

Which products and services areselling and which ones aren't? Arecustomers responding to social mediaoutreach or specific promotions? Arethey opting for lower-price items with fewer frills or arethey willing to splurge on luxury models? And what dothese trends mean for the future?

A review of sales records may reveal an opportunity to sellmore products and services to existing customers or shiftyour product mix without increasing overhead. A review ofoperational data may highlight areas of excess capacity thatcan be used to generate additional sales and profits.

"Segmenting your customer base by key demographicsand tracking their activity and behaviors can illuminate

12 Smart Business Atlanta | May 2013

Online bankingimproves businessefficiencies and profits

opportunities to grab additional market share throughupselling or by offering current customers discounts forpurchasing greater quantities," Thomson says.

Simply repositioning a product or putting it on thefront page of your website can boost sales and profitswithout raising costs, says Alan Reinstein, professor ofaccounting at Wayne State University. In fact, storingraw materials and products for an extended period oftime can tie up cash and erode profit margins.

"Grocery stores put milk near the back of the storebecause it forces customers to stroll past higher marginproducts," he says. "It doesn't cost them a dime toevaluate sales data or use the results to craft or validatethe efficacy of a product-positioning strategy."

Since a rise in customer satisfaction increases retentionand generally precedes a growth in sales, using abalanced scorecard or dashboard to track revenue,sales activity and customer sentiment can help businessleaders interpret die needs of the marketplace and makeadvantageous moves.

Robert Kaplan and David Norton of the HarvardBusiness School originated the balanced scorecardto give managers and executives a more poised viewof organizational performance by adding strategic,nonfinancial performance measures to traditionalfinancial metrics. A holistic view of the organizationallows executives to synthesize multiple data streamsand accurately predict future performance, Towrysays.

Instead of calling to check an account balance or to find out if a

check has cleared, time-starved executives are finding it easier

to focus on sales and profits - through

technology.

Online banking customers are the most '

engaged because they're using all available

channels and tools to drive efficiencies and

profits, says Jan Hoyt, senior vice president

of business banking product management for

PNC Financial Services Group Inc. i

"They're managing cash flow by depositing • \ ^

checks from their smartphones and using »e» *»*t?*^

electronic invoicing and bill pay to control

the inflow and outflow of funds with a few clicks of a mouse from

anywhere on the planet," Hoyt says. "In turn, we're able to discuss

forecasting tools, global expansion or e-commerce solutions instead

of routine banking transactions."

For example, online statements allow business owners to review and

print account statements on demand while the bank handles storage

and security

"Business owners can balance their accounts more quickly and

can control who has access to their statements just by requesting

online statements," Hoyt says. "And since we archive statements for

seven years, it reduces the need for secure document storage and

disposal."

Instead of purchasing hardware and software, smaller businesses

can save money by using PNC's treasury management, account alert

and online payroll services. Many transactions can be processed by

the bank's computers, a process that not only saves time but also

reduces the need for IT staff and infrastructure.

In addition, having a relationship with a major bank and using its

invoicing and online payment system may boost a company's

credibility and stature with clients and prospects.

"Just as having a strong Web and social media presence levels the

playing field for small and midsize businesses, banking in the cloud

gives growing companies access to the same services as large

companies without increasing overhead," Hoyt says.

How to reach: PNC Financial Services Group Inc.,www.pnc.com or (888) 762-2265

May 20131 Smart Business Atlanta 13

SPECIAL REPORT ACCOUNTING

"I'm an advocate of the balanced scorecard becauseit helps business leaders change course or adjust theirstrategy on the fly by aggregadng financial data andother key metrics and compares them to the goals intheir business plan," she says.

Apply activity-based analysisActivity-based analysis and costing is a way for managersto assess the performance of assets on their balancesheet and which products and customers are generadngthe most revenue and profits. The process also helpsmanagers determine where improvements in quality,efficiency and productivity will yield the best return.

"Comparing costs with acdvides is common amongcerdfied management accountants because it helpsmanagement identify key cost drivers and potentialsavings by allocating direct and indirect costs to everystage in the order, manufacturing and distrihudonprocess," Thomson says.

The analytical methodology often highlightsopportunities to increase profit margins by outsourcingdistribution or ancillary services to less costly externalproviders or automadng manual manufacturingprocesses, or it may disclose an opportunity to increasecash flow by offering quick-pay discounts or incentivesto major customers.

If reducing costs isn't an opdon, business ownersmay be able to raise prices and margins for a particularproduct by using a formula to calculate elasticity ofdemand, which measures how the demand for goods andservices varies with changes in price.

Generally speaking, the greater the number ofsubstitute products available, the greater the elasdcitywill he. Naturally, very high price elasdcity means thatcustomers are sensidve to price changes, while very lowprice elasticity means you can raise the price of a top-selling product without effecting demand.

From a trend perspecdve, a sudden rise in priceelasdcity may portend an upcoming decline in salesunless executives inidate discounts or take steps todevelop and launch new products.

Business owners ofiien decide to eliminate unprofitabledivisions or product lines after conducting an acdvity-basedanalysis, hut they should proceed with caudon, Towry says.

SCAN to learn more about thePNC Financial Services Groupor go to www.pnc.com.

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"Executives assume thateliminating unprofitablesegments will increase profits,but the fixed expenses don'tgo away."

-KRISTYTOWRY, ASSOCIATE PROFESSOR OE ACCOUNTING,

GOIZUETA BUSINESS SCHOOLAT EMORY UNIVERSITY

"Executives assume that eliminadngunprofitable segments will increaseprofits, but the fixed expenses don'tgo away," she says. "They may endup launching a fatal cash crunch ordeath spiral once the revenue fromthat discontinued segment is no longer offsetting thosefixed expenses."

By using the financial data from your accountingsystem and applying alternative costing models, you'll beable to determine how much overhead is being coveredby the sales of each product and whether it makes senseto discontinue a particular segment or service.

Dare to compareComparing key ratios and data from your accountingsystem to similar companies in your industry canhighlight opportunities to lower costs, increaseefficiencies and improve your company's bottom line.

Industry associadons often provide benchmark data,and sites like Valuadon Resources.com aggregate andprovide information, research and analysis for more than400 industries.

Start by breaking down your company's accountingand operational data into standard industry measures,such as sales per square foot, same store sales growthor something as simple as the number of gallons ofwater used per car wash. Then compare your results tothe standard for your industry to see where you have acompetidve advantage or need to improve.

Major deviadons from industry norms should invokequesdons and a search for solutions, Reinstein says.

For example, a compedtor may have lower selling,general and administrative expenses because they usee-commerce or distributors to push products insteadof salespeople. Or they may be experts at using theirpoint-of-sale system to increase loyalty and market shareby offering customers incentives or rewards for makingaddidonal purchases.

1 4 Smart Business Atlanta | May 2013

"It's critical to dive into the details and not ignorethe trends, because a svelte, nimble company withample cash reserves can force a sluggish competitorout of business in a heartheat in a tepid economicenvironment," Reinstein says.

Cash is kingWhile profits are important, cash is the key to survivalfor any growing company.

A cash-fîow analysis tracks the movement of moneyin and out of your business by looking at operating,investment and financing activities. It also providesbusiness owners with an accurate picture of theircompany's profitability hy using noncash items andexpenses to adjust profit figures.

Another useful way to spot trends and analyze financialstatements is by performing either a horizontal orvertical analysis, which compares numbers fi-om oneperiod to the next. The analytical methodology maypoint to favorable or unfavorable changes in cash flowtliat could spell trouhle unless they're corrected.

You're probably in good shape if your cash is growing,and it accounts for 10 to 20 percent of your assets. If it'snot, then you need to figure out where it's going. Is itcosting you more to manufacture the same products, orhave competitive pressures forced you to reduce pricesduring the last year?

Vertical analysis lets you compare each componentof your financial statements over time to determine ifand where significant changes have occurred. You mayneed to focus on collections or stop extending credit tomajor customers if receivables are growing too quickly,or you may need to reduce inventory if the payments onyour short-term line of credit are chewing up cash andaffecting your company's liquidity.

Managing fixed expenses is critical for growingcompanies, Towry says. Otherwise, a hlip in theeconomy can lead to an insurmountahle cash shortage.Don't just look at expenses when reviewing yourfinancial statements. Break down fixed and variable costsand apply varying revenue forecasts to see how changingcircumstances affect your cash position.

"Companies that overinvest in equipment, buildingleases or inventory can't manage those costs downwhen the economy heads south," Towry says. "Businessowners need a cash budget and an awareness of cash inrelation to profits because there's no magic bullet for amajor cash crisis." •

How to reach: Goizueta Business Scinoo! at Emory University,www.goizueta.emory.edu; iHarvard Business School www.hbs.edu;Wayne State University, www.wayne.edu; institute of ManagementAccountants, www.imanet.org

Accounting booksfor CEOs

Competing on Analytics: The New Science of Winning .Thomas H. Davenport and Jeanne G. HarrisHarvard Business School Press, 217 pages .7,7;,, ~ „ ,„„

Although business leaders have more data Competing on

at their fingertips than ever before, you may nildiy lICSbe missing out on a potent competitive toolunless you use the information to outthink yourrivals. In "Competing on Analytics," Davenportand Harris describe the emergence of a new ^'^^form of competition that thrives on fact-based decision-making.They discuss the benefits of using data to analyze businessproblems and outline four pillars of analytical competition - adistinctive capability, enterprisewide analytics, senior managementcommitment and large-scale ambition. The authors also sharenumerous stories about how companies like Capital One, Honda,Marriott and Progressive Insurance compete analytically.

Cost & Effect: Using Integrated Cost Systems to DriveProfitability and PerformanceRobert S. Kaplan and Robin CooperHarvard Business School Press, 358 pages

Kaplan and Cooper take the management, financeand accounting fields to an entirely new levelin "Cost & Effect" by demonstrating how theprinciples of activity-based costing and otheradvanced cost management techniques, suchas target and kaizen costing, can drive businessperformance. They can help you determine where improvements inquality, efficiency and productivity will yield the highest payoffs andhow integrating an activity-based cost system into reporting andbudgeting processes can reveal sources of excess capacity.

Moneyball: The Art of Winning an Unfair GameMichael LewisW.W. Norton & Company, 303 pages jg-

Although Lewis' "Moneyball" is a narrative about M O N E Ybaseball success, it's also ttie story of how Oakland -; "" ^A's general manager Billy Beane reinvents histeam by analyzing data and signing undervaluedplayers whom the scouts consider flawed. Beane's frenegade tactics apply to the business world byproving that many traditional yardsticks of success are fatally flawedand that underdogs can win by outsmarting the competition. Beaneprevailed with the second-lowest payroll in baseball because he wasa pioneer who understood the power of data and analytics.

May 20131 Smart Business Atlanta 15

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