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Issue 11, July 11, 2007

In This Issue

Open Book Management: It's just common sense

JAB2

Open Book Management: It's just common sense

What is your company trying to accomplish over the next year? Are your employees trying to accomplish the same thing? Does everyone in the company understand how the financial statements will be affected by those efforts?

Open book management is the idea that everyone in the company should be focused on one or two goals that are tied directly to the financial statements. After all, this is what the owners of the company are focused on, so why shouldn't the employees be on the same page. In this newsletter I will outline three key principles of open book management (OBM) and how Axiom is helping clients put them into practice.

The first principle of OBM is SIMPLICITY. Many companies struggle to build tangible goals and performance criteria for employees. Sales people often receive commissions, but sales at any cost can hurt the company in other areas. Line workers may be focused on production, but excessive factory overtime eats away profits. OBM cuts through these competing agendas and focuses everyone on one or two financial statement numbers that impact the entire company.

Two common OBM measures are revenue growth and profitability. Success is defined by achieving a certain level of revenue growth while maintaining or increasing net profit margins. This means that sales people cannot cut prices just to increase volume. It also means that production managers must keep tabs on labor and inventory costs while keeping pace with sales forecasts. At it's heart OBM is focused on making measurement as simple as possible by tracking the entire company's progress, not just the progress of one department or employee.

This leads to the second principle of OBM, EDUCATION. Employees won't make progress unless they understand how their performance impacts the financial statements. This is the biggest challenge facing companies who want to implement OBM principles. Educating employees takes time and a greater commitment to communication than most companies are accustomed to.

Probably the worst thing

managers can do is just throw open the books hoping employees will understand the information and use it to improve the company. This never happens. Instead ill informed employees often use the information against the owners because they don't truly recognize its implications.

Instead management needs to start small by showing individual departments and employees the costs associated with their activities. Next these costs are traced to the specific lines affected on the income statement. The same process is followed to show how activities affect revenues. In this way employees come to understand the income statement from a bottom up point of view. Eventually, managers can introduce employees to the balance sheet and show how their actions affect the financial health of the company on a long term basis.

A third principle of OBM is ACCOUNTABILITY. Owners who start down this path need to understand that they will not only be giving their employees financial information, but also the means to hold ownership accountable. There is something powerful in saying "These are the numbers we as a company are going to work toward." And because their bonuses will be tied to these measure employees will pay attention.

Once employees see everyone striving for the same goal a level of team work and commitment evolves that was previously missing. But if they sense that ownership isn't playing along they will become disenfranchised and apathetic.

With our clients we first build a sense of trust with employees by establishing a series of small wins. These wins and the resulting rewards teach employees that management is focused on achievement and the owners will make good on their promises if the goals are met. In most cases we're talking about pizza parties, happy hours and little celebrations. What's important is that we set a goal, we hold everyone accountable to the same standard and when the goal is met we celebrate.

Owners often underestimate the importance of this step, but without trust and accountability OBM will never get off the ground. Employees simply won't believe that ownership will do what it says it will do if the goals are met.

This is only a glimpse of OBM. At it's heart OBM is more a communication philosophy than a bag of management tricks. I really think it's just a common sense way to run your business, but it's not easy. If you're interested in learning more consider going through our 13-week open book management training. You can find out more at our web site.

Quick Links

Dear Clients and Friends,

It's summer time. Along with the 90 degree heat and humidity summer brings a slower pace for businesses. You may have time to tackle some of those projects that were put off during season, and with vacations nearing completion people should be around to help you.

In this issue we are going to talk about some of the projects we have been helping clients work through. These include outsourcing payroll, assessing accounting practices, and implementing open book management principles.

Thanks for your continued support of our newsletter. As always, the content is home grown and your feedback helps make it better. We hope you find the topics useful. If so please forward them to a friend or colleague using the "forward email" link at the bottom of the page.

Payroll Outsourcing

paycheck Years ago it wasn't uncommon to find many accounting firms offering payroll services. Today small practitioners and some niche firms continue to offer payroll, but most of this business has gone to larger national companies. Payroll has become more complex with the growth of employee benefit plans, retirement contributions, electronic banking, wage garnishments, etc. Add to that the headlines of small payroll processors skipping town with their client's payroll tax deposits and it's not surprising that businesses are more comfortable with a large, stable company when it comes to such an important function.

Payroll outsourcing can take a couple of different forms. When businesses use a payroll preparation service such as Paychex the business continues to report salaries, wages, and workmans compensation under its own federal and state ID numbers. These businesses have the advantage of building their own experience ratings for state unemployment tax, workmans compensation and possibly group health care pools.

Employee leasing is another alternative that involves hiring a professional employer organization (PEO). These companies hire your employees for you and then lease them back for a fee. The idea is that by aggregating large numbers of employees the PEO can save it's clients money by getting better rates on workmans compensation insurance, health insurance and lower state unemployment tax rates. The disadvantage is that the client has no experience rating for workmans comp or unemployment tax so if the arrangement is ever terminated the client can see a big increase in premiums and taxes.

Both payroll preparation and employee leasing have their place. We tend to favor payroll preparation because it puts the client in the driver's seat concerning their long term experience ratings and tax rates. Leasing is very helpful in industries where workmans compensation insurance is expensive or hard to obtain or in cases where group health care options are limited.

As for costs, leasing is often more expensive. The actual fees for PEO administration can be hard to decipher since providers make money on both the payroll administration and insurance products they sell. Payroll preparation services on the other hand tend to be priced on a fixed, per check basis so it's easy to know what the service is costing you.

When outsourcing payroll it's most important to use a well established company that you can trust. A small business I know recently lost $92,000 when their payroll company folded without making required tax deposits. With something so important we don't take any chances. For several years I have recommended Paychex exclusively to our clients. We continue to be impressed by their level of service and responsiveness, and I sleep easy knowing our clients are in good hands. Be especially wary of PEO's that quote workman's compensation premiums that sound too good to be true. They usually don't stay in business very long.

If you would like to discuss payroll outsourcing further or wonder if it's a good fit for your company please give us a call. Our personal contact at Paychex is Michele Merryman. She can be reached at (941) 706-5679.

Accounting Best Practices - Why should you care?

checklist Why should business owners care about accounting best practices? This is a good question. There are probably a lot of things you could do to improve your record keeping, financial reporting and internal controls. But do you really need to? After all, there are so many other areas of your business that need improvement as well. Why should accounting get more attention than marketing, or sales training, or any of a number of other critical functions?

We're used to these questions because we are usually the ones asking them. In our work with companies large and small we have to first justify the effort of making a change against the resulting payback. In this brief article I am going to give you just one example of an accounting best practices and why the end result is worth the effort.

The monthly close checklist: Every month controllers, accounting clerks and CFO's groan a sigh of relief when the books are finally closed. This process of accruing expenses, writing off bad debts, booking depreciation and any number of other tasks is necessary to prepare accurate financial statements. But most companies, regardless of size, do not use a checklist to guide their monthly close routine. Why?

Controllers most often tell us that no two months are the same and a checklist would give them a false sense of security that they haven't missed anything. However, this is usually just an excuse to avoid the discipline that a checklist requires. A checklist can reduce the time to cover the routine tasks leaving more resources to consider the unique items for that month. And it should be modified so that at most, an item is missed only once before it is added to the routine.

One big payoff in creating a checklist is that it facilitates delegation. With all the chores for the month down in writing the controller can dole out responsibility for tasks before month end. Many adjustments (in fact most of them) can be made prior to month-end. It just takes good communication and a thorough understanding of all the things to be done. The checklist accomplishes both of the these objectives.

Another big payoff to a closing checklist is faster turn around on financial statements. If the checklist is used to delegate tasks prior to month-end and the remaining items are all understood by the accounting staff it is much easier to close the books quickly. We have worked with some companies that close their books on the last day of the month, and most other clients have their books closed within two business days of month end. Compare that with their prior closing times of two to three weeks and you can see a vast improvement.

In the end those using a closing checklist get better information because they are assured that the same mistakes never happen twice. They also receive more timely information that enables quicker decision making. Remember, if it takes you three weeks to close the books you've repeated the mistakes of last month for three weeks longer than needed.

Accounting best practices include many topics other than closing checklists and fast close procedures. Axiom has developed a survey that will help your company assess where it stands in terms of best practices, and which improvements will result in the biggest payback over the least amount of time. The survey can be found on our web site at www.axiomcpa.com\services_BPS.htm.

Axiom job opportunities

We are currently searching for a junior accountant to join our team. Candidates should have bookkeeping experience and a working knowledge of business taxes. Public accounting or experience as a bookkeeper-for-hire is preferred. Send your resume and a letter of introdution to jbrannon@axiomcpa.com.

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Axiom Professional Group, P.A. | (941) 745-8006 | 1401 Manatee Ave W, Ste 510 | Bradenton | FL | 34205