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Readers write to tell us that allocating overhead costs is a key to profits; that writing down goodwill may be a prudent accounting move these days; that the chance for personal growth is an upside of the financial crisis; and more.
CFO Readers, CFO Magazine
March 1, 2009
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I'm amazed at the ingenuity of the CFOs referenced in "Prognosis: Negative" (February). They are certainly thinking outside the box. However, there are many more options available for reducing double-digit increases. My advice: find a strong broker to help you navigate the process. Qualified brokers are worth their weight in gold and should be able to recommend changes that will save the average company tens of thousands of dollars.
Chief Executive Officer
Nexus Benefit Consulting
Firing Customers Is Risky Business
"Playing Favorites" (January) is an enthusiastic presentation of benefits that can be sought by firing customers. But this is a risky approach, and I'd like to offer two cautionary notes. First, the determination of customer profitability must be accurate. If customers are in the wrong order by profitability, firing some percent of them will likely drop some that should be kept and keep some that are not desired.
Attribution of overhead or support costs is key to profit determination. Allocation should be done with care. Reciprocal allocation or activity-based costing should be used where applicable. These techniques can be expected to yield a significant improvement in accuracy.
Where the order of profitability is concerned, accuracy is more than just another decimal place. This is because of what I like to call the Iron Law of Allocations: When one is too high, another is too low.
Consider a dollar of overhead mistakenly attributed to Customer A instead of Customer B. Every dollar of mistake changes the distance between A and B by $2 because one goes up and the other goes down. That's bound to cause changes in the order of profitability when the errors are at all significant.
Second, unless service costs are reduced promptly, dropping some customers will add to the all-in cost of serving the remaining ones. Service capability and costs are sticky: slow to reduce and expensive to restore when business goes up. Overhead won't just go away. It would be hazardous to assume so on the basis of good intentions.
In sum, while expensive customers shouldn't be subsidized at the expense of (potentially price-sensitive) profitable ones, avoiding or fixing this situation should be approached with care, considering other alternatives in addition to that of firing customers.
Parallel Business Software
Chatham, New Jersey
Restoring the Value of Your Reputation
Accountants speak of goodwill and balance-sheet intangibles ("Goodwill Hunting," January); in my world of intangible-asset and reputation management, we speak of the difference between book value and market capitalization.
These intangible assets make up the internally developed intellectual assets that enable business processes for quality, safety, security, integrity, sustainability, innovation, and so on. Reputation, of course, is the impression formed by stakeholders of how a company manages its intangible assets. CFOs, in their operational and reputational risk-management role, need to manage both book- and market-based intangibles.
You discuss the merits of goodwill write-downs. In my view, intangible asset write-downs began in the capital markets in mid 2007 and accelerated in late 2008. Where once intangible assets constituted 70 percent of the median market cap of traded companies, they made up less than 50 percent in December 2008.
Taking advantage of the current markets to write down goodwill may be a prudent accounting decision. I argue that CFOs should be equally attuned to the opportunity to improve internal business processes, including risk management, to restore corporate reputation value and market intangibles.
Steel City Re
The Blessing of Crisis
Reading through the myriad articles these days that highlight the doom and gloom surrounding the financial world, it was great to come across one that actually touched on some of the positives ("And Now for the Good News...," January).
But there's more benefit to be had beyond just cheaper prices, a heightened awareness of a CFO's value, and an increase in available finance talent. I, like so many others in the finance field, have been broken and humbled by the challenges and disappointments that have filled my workdays these past several months. But if we look beyond the numbers and broaden our perspective on things, there's an invaluable opportunity for personal growth made available to every one of us.
Amid all the struggles that companies and individuals alike have experienced — and, in many cases, continue to experience — we can listen to the words of two ancient figures and realize that there is an element of blessing to what we're going through these days. It was said by a man 3,000 years ago that with humility comes wisdom. A thousand years later, another said we should consider it pure joy whenever we face trials, because that is what develops perseverance within us.
Finding joy in today's world may be easier said than done, but I do know this: those who seize the opportunity to gain wisdom and perseverance during these times of trial will be the ones leading the charge when times of plenty return.
Chief Financial Officer
RQ Construction Inc.
Don't Be Shortsighted
I agree that focusing on improving revenue is the surest way to maintain viability during tough times ("And in This Corner, the Price-Fighter," December 2008). Let a third-party expert cut your expenses on a true gain-sharing model. Our expense-reduction business is up significantly, but companies should continuously be reviewing expenses for opportunities to cut costs. So much focus on cutting travel expenses and head count is shortsighted at best.
Expense Reduction Analysts
Commenting on supply-chain pressures in "The Next Wave" (February), Sam Rovit was misidentified. He directs the Corporate Renewal Group at Bain & Co., a global business consulting practice.