Formulized Cost Containment

I am often asked what the difference is between a CFO and a Controller, Staff Accountant or even Cost Accountant. My response generally has to do with a long-term global view of the organization. A Controller or chief accountant is primarily concerned with reporting the financial results of the organization. A staff accountant may have a more limited role in assisting the Controller as well as being responsible for Accounts Receivable or Accounts Payable etc. While a Cost Accountant is responsible for gathering, compiling and communicating a variety of information about an organizations activities. All three, the Controller, Staff Accountant and Cost Accountant are responsible for generating reports that compare actual results compared with planned results. These reports enable management to make changes to activities in order for the organization to exceed its plans.

Another way to look at these roles is to say they report the recent history in order to help steer the organization through the future. Reporting the organizations history is a vital role that also allows the organization to fulfill its legal obligations to owners, creditors as well as taxing authorities. However, if you are only going to use reports of past activity to operate your organization, it’s kind of like driving only looking through the rear-view mirror of your car. Starting from the financial reports, adding trend analysis, future expectations and market conditions allows you to create a Financial Forecast.

The Financial Forecast becomes part of your operating plan and will demonstrate where you need to either increase pricing or reduce costs. I am sure you have heard that not all costs are the same. Companies that reduce costs without measuring the full impact of the reduction cause customer service and quality problems. The costs that should be reduced are those that do not harm either one of these key components of sales. No matter how much you reduce your costs, if your company is unable to sell the products or services you bring to market, you will still be out of business.

Recently the morning newspaper in Cincinnati cut out re-delivery, which is sending somebody out with a newspaper should your carrier miss your delivery. I am sure that when they were looking at all of the costs of delivering a newspaper this was a minor one. However, it also has caused at least one subscriber to drop daily delivery. Not a big revenue hit. Less than $150 per year, however, the real revenue for newspapers comes from the display advertising. Those rates are based on paid subscriptions. Hopefully somebody found out how many subscribers could be lost by dropping re-delivery and what that would cost in lost advertising and circulation revenue.

See, there is much more to cutting costs in order to maintain profitability.

@strategic Financial Leadership, Inc.

Strategic Pricing

One of the most difficult problems an enterprise encounters is how to price its goods or services. The price has to be high enough to cover all of its costs and generate overhead coverage and profit. The CFO can assist the organization by making sure that it does not just use cost containment in setting price. By introducing concepts such as Break Even analysis, Fixed and Variable costing analysis we can begin a discussion that will lead to strategic pricing guidelines. I say guidelines because the pricing needs to be flexible to match market conditions that will occur over time.

The CFO will look not just at the present costs but will also use forecasts of future cost changes. This long-term globalized view of the organization is necessary in order to maintain sustainability for the organization. A Controller or cost accountant will generally be more focused on past or present costs since those are what they are charged to focus on.

I am not advocating that the Strategic Pricing decisions be made solely by the CFO, I am advocating that she or he be at the table to allow the organization to have its strongest team making its most important decisions. This team may be led by the CEO/President/Owner but should also have somebody who is fully versed in market conditions for the industry the organization finds itself in.

Strategic Pricing decisions should be model driven so that they can be flexible and the organization can be responsive to the market changes that occur daily. The goal of strategic pricing is not always to obtain the maximum profit available. It is to maximize profits and market share without being so excessive that customers are driven to alternative products or services. Simultaneously, it must generate enough profitability that the organization can continue to refine its products or services to meet the needs of a changing market.

What does this mean to a smaller organization without a CFO or Marketing talent on its payroll? The pool of consultant talent that can fill these gaps is growing daily. Hire one before you price yourself out of business.