Pretty much every company wants to increase its profit, and most managers devote a large portion of their time to trying to increase revenues and margins, or reduce costs. As a financial manager and consultant, I have been involved in many profit improvement initiatives. Here are some examples – they are mostly from construction, retail and land development, but the concepts can be applied to any business.
Delay of Expenditures
Time is money. Delaying expenditures until absolutely necessary reduces interest, storage and other carrying costs, reduces pressure on borrowing limits and has a positive impact on return on investment. Speeding the receipt of funds has the same impact.
A land developer traditionally let marketing decide when certain tracts would be made available for sale to builders. The sites they selected appeared to be random throughout the communities, and they professed no particular strategy. I proposed marketing contiguous tracts to delay the outlay on roads and other infrastructure costs. As a result, we delayed the spending of tens of millions of dollars, and there wasn’t a grumble from marketing.
A retailer’s distribution center was designed to service a fixed number of stores, and the time was upon us to start construction on a new, larger center. The limiting factor was the number of boxes that would fit on the conveyors that passed in front of the merchandise pickers. I observed that if we simply changed the shape of the boxes, we could serve up to 50% more stores without incurring the multi-million dollar capital expenditure.
Homebuilders often sell their model homes to investors, and lease them back until the community is sold out. The process is rather complex, involving the buyer, various attorneys, appraisers, the construction and marketing departments, accounting and treasury, among others. Meanwhile, the clock is ticking on interest and carrying costs until the transaction is completed. I led a Six Sigma team to look into speeding the inflow of cash. We flow-charted the process, identified bottlenecks and delays, and established a standard timetable to be followed on all future transactions. We reduced the cycle time by three weeks, and calculated annual savings at $400,000.
Does your CFO get involved in planning your major expenditures?