| Summer 2008 |
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INFOLETTER
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Partner's Perspective |
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Management Strategies: How to Use Key Performance
Indicators
By James E. Merklin, CPA, CFE, Partner
There’s a management axiom that says "If you can measure it, you can manage
it." An important part of the measuring process is developing key
performance indicators (or KPIs) that can help you define and gauge your
progress toward reaching goals.
KPIs are quantifiable measurements that reflect your organization’s
critical success factors. No two companies’ or organizations’ KPIs will be
the same—they will vary depending on the type of organization (non-profit vs.
for-profit, for example), industry and, of course, each organization’s
specific goals and objectives.
Mission and Goals
Before you can identify which performance indicators are the most important
ones to be monitored and measured within your organization, you must first have
a well-defined mission statement and clear, measurable goals. Your KPIs will
emerge from and support your mission statement and goals.
The most important characteristics of KPIs are that they be specific and
measurable, and that you be able to compare them to a benchmark. A KPI simply
stated as "Increase sales," for example, cannot be measured. Better: "Increase
sales revenue by 10 percent each year for the next three years."
Before setting such a goal, however, you need to know whether a 10 percent
increase is good or bad. To determine this, you need benchmarks to compare this
number to and put it in perspective.
Benchmarks can be prior years’ performance or industry averages. For
example, you could compare your accounts receivable collection time (or AR days
— see below) to your terms of sale and industry averages to see how well you’re
doing against your peers and your own internal standards.
The best sources for information on industry averages and benchmarks are your
industry trade association and the Risk Management Association (RMA), which
publishes RMA’s Annual Statement Studies each year. This is a comprehensive
list of financial performance statistics for small and mid-sized businesses,
derived primarily from the financial statements of business borrowers and
organized by Standard Industrial Classification (SIC) code. Visit
http://www.rmahq.org for details on how to order.
Financial KPIs
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Are Your KPI's SMART?
Are Your KPIs SMART?
Keep this acronym in mind when identifying Key Performance Indicators. KPIs should be:
- Specific
- Measurable
- Achievable
- Relevant
- Time-bound
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On the financial side, KPIs often include common ratios and metrics such as:
- Current ratio — Shows how many times current debt could be paid
off with current assets. The formula: Current Assets / Current Liabilities
- Debt-to-equity ratio — Measures debt capacity. The formula: Total
Debt / Shareholder’s Equity
- Accounts receivable (AR) days — Measures how long it takes to
collect the money that’s owed to you. The formula: AR × 365 / Annual
Sales
- Accounts payable (AP) days — Measures how long you take to pay
your vendor invoices. The formula: AP × 365 / Cost of Goods Sold
- Inventory turnover — Shows how often your inventory "turns
over" in a year. The formula: Cost of Goods Sold / Inventory
 You should have specific goals for the financial ratios and metrics that you
determine are key for your business. For example, four times a year is a
common inventory turn, and 3:1 or less is generally considered an acceptable
debt-to-equity ratio for companies seeking bank financing.
Again, don’t just look at these ratios in isolation, but compare them from
quarter to quarter or year to year to look for trends that can help you
improve financial management.
For example, if accounts receivable days is improving from quarter to
quarter, this likely reflects an overall improvement in your collections
efforts. By monitoring your cash flow cycle — the cycle of cash conversion
from inventory to sales to receivables and back to cash again — you can
benchmark everything from a slowdown in receivables collections to an
increase in inventory turnover.
Non-financial KPIs
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Check Your KPI Gauges
To get a better picture of what Key Performance Indicators might look like, think about your automobile’s dashboard. It probably includes a number of different gauges and lights designed to alert you to potential problems with your engine.
There are also gauges you can monitor to help you keep an eye out for potential problems with your business. For example:
- Inventory—By regularly monitoring your inventory levels and turns, you’ll have early warnings if valuable cash is sitting idle on your shelves in the form of items not moving as fast as they should.
- Cash Flow—Keep a close eye on accounts receivable agings to determine if receivables are creeping up, which could lead to an unexpected cash flow crunch in the near future.
- Growth—Most small and mid-sized companies need to be careful not to grow too quickly, as growth can put a serious strain on resources. Debt-to-equity and debt-to-tangible net worth are two financial ratios you should monitor to keep growth in check — in general, neither should exceed
3:1.
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While KPIs are often thought of within the financial realm, non-financial
indicators can be just as useful — and often more so, depending on the
organization. Here are a few common non-financial business indicators
expressed as KPIs:
- Customer service: Percentage of calls answered within the first three rings,
or e-mails returned within 24 hours.
Example KPI: We will answer 90 percent of calls to the customer service
department within the first three rings, and return 90 percent of e-mails
within 24 hours.
- Human resources: Level of employee turnover.
Example KPI: We will maintain an employee retention rate of at least 90
percent.
- Manufacturing: Number of units rejected by quality control.
Example KPI: The reject rate for units on the assembly line will not exceed
1 percent.
- Management: Percentage of clients retained in one year.
Example KPI: We will maintain a client retention rate of at least 90 percent
during the upcoming year.
- Marketing: Number of new customers acquired.
Example KPI: We will acquire five new customers each month for the next
year, or a total of 60 new customers over the next year.
Get Everyone On Board
KPIs should be clearly communicated to everyone in your organization so that
all stakeholders have a clear picture of what indicators you have deemed to
be most important, but especially to anyone who may have a direct hand in
making them happen. Explain them in company and department meetings, mount
them on the walls in your hallways or lunchroom, and post them on your
intranet or even your Web site.
You can even use them as a "carrot" by basing employee bonuses or other
incentives on the achievement of KPIs. Just be sure everyone knows what the
targets are, and keep employees regularly informed about progress toward
reaching them.
We can help you determine key performance indicators for your organization.
For assistance, please call or email me at jimm@bobermarkey.com.
BMF&C
Retirement Plans: Are You
Meeting Fiduciary Responsibilities?
By Danielle
J. Kimmell, CPA, Senior Manager
 If you offer a qualified retirement plan to your workforce, you are providing a key benefit that will not only help your employees better prepare for their financial future, but also help you compete with other companies in the hiring and retention of the best candidates.
As a retirement plan sponsor, however, there are duties and responsibilities that you must fulfill. The Employee Retirement Income Security Act (ERISA) sets very specific standards of conduct for anyone who administers, manages and/or controls an employee retirement plan and its assets. Such an entity is referred to as a fiduciary of the plan.
What Makes a Fiduciary?
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Staying in Compliance
Here are a few pointers to help you understand and comply with the your
fiduciary responsibilities:
Thoroughly read and understand all the terms of the retirement plan
document.
Select and monitor plan service providers (especially your trustee and
TPA) carefully.
Provide summary plan descriptions and summary plan reports and file
form 5500's on time.
Carefully document all processes, procedures and decisions relating to
the plan.
Regularly monitor (at least annually) the investment choices
participants are offered to ensure that they are still adequate.
The Department of Labor (DOL) has published a helpful booklet titled
Meeting Your Fiduciary Responsibilities — download it for free at
http://www.dol.gov. |
A number of different actions involved in operating a retirement
plan will result in a person or entity being named as a fiduciary. In short, a fiduciary is any person or entity that exercises discretionary authority or control over the plan’s management and/or disposition of its assets. It’s important to note that fiduciary status is based on the functions performed for a plan, not on a person’s or entity’s title.
A plan’s fiduciaries will usually include the trustee, investment advisors, members of a plan’s administrative committee, and anyone who selects committee officials. Every qualified retirement plan must have at least one fiduciary (either a person or an entity) named in the written plan as having control over the plan’s operation.
Many plan sponsors mistakenly believe that once they’ve hired a third party administrator (TPA) or plan trustee, they no longer have any legal responsibility for the plan’s management or operations. As the plan sponsor, your company — and in most instances, yourself and your officers — can be held legally liable (and sued by plan participants) for breaches of your fiduciary responsibilities.
The primary duty of a retirement plan fiduciary is to act solely in the interest of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them. Other specific responsibilities include:
- Carrying out all fiduciary duties prudently.
- Following the regulations and terms of the governing plan documents carefully.
- Offering a diversified option of plan investment choices.
- Paying only reasonable plan expenses.
- Making all necessary plan decisions.
- Investigating whether any outside help is needed to administer the plan, and then hiring these experts, if needed.
Making Deferral Deposits
One common fiduciary mistake made by plan sponsors is failing to deposit deferral money withheld from employees’ pay into their accounts in a timely manner. Sponsors of retirement plans are required to deposit participants’ salary deferrals into the plan as of the earliest date on which the money can be reasonably segregated from the sponsor’s general assets, but no longer than 15 business days after the deferral. Failure to do so has resulted in actions taken against employers, including significant penalties and potential legal actions.
The Department of Labor (DOL) has proposed a safe harbor regulation currently out for comment for small retirement plans (defined as those with fewer than 100 participants) that would define "reasonable time" as within seven business
days of the deferral. In the meantime, it’s best to err on the side of caution and not cause any delays in the deposit of deferrals into employees’ accounts, as this is an area of particular concern and attention for the DOL right now.
The price of failing to fulfill your fiduciary duties can be steep. Employers who are determined to have breached their fiduciary responsibilities may be required to make the plan "whole" — that is, restore its assets to where they were before the breach, including potential lost earnings — and may also be subject to penalties and fines. This is in addition to facing potential lawsuits from participants and their beneficiaries, both jointly and severally.
For help in understanding and meeting your fiduciary responsibilities, please feel free to call or email me at
danielle@bobermarkey.com anytime.
BMF&C
Overseas Etiquette: Rules of
the Road for International Business
By Paula S.
DiVencenzo, CPA, Senior Tax Manager
 More and more companies today are venturing into the waters of international business. While the potential rewards of global trade are great, so are the potential risks.
One of the biggest risks lies in not understanding the distinct cultural subtleties and nuances that exist from one country to the next. An innocent faux pas that violates social mores in a particular culture can undo years of groundwork that has been laid in building relationships with customers and vendors overseas.
Do’s and Taboos
In his book Do’s and Taboos Around the World, Roger E. Axtell, a retired worldwide marketing executive, offers a comprehensive guide to appropriate business and social behavior in countries all over the world. Following are a few interesting tidbits as they relate to some of the most popular countries and regions where U.S. companies are now doing business.
China — Building strong relationships with business partners in China is essential, but it takes a long-term commitment. To many Americans, this may make the decision-making process appear to move very slowly. But here’s the contrast: While businesspeople in the U.S. tend to make fast decisions based on competitive issues like price or delivery schedule, in China, businesspeople will make the price and schedule work if you have taken the time to build a strong relationship.
A few other helpful notes about doing business in China:
- Never take your seat in a meeting until your client sits down first.
- When proposing a toast, make sure your glass is lower than your client’s glass.
- Tipping is generally considered an insult and should be avoided.
India — Men should generally try to avoid touching women, even to shake hands — a slight bow, with palms placed together, may be more appropriate. Also, there is a belief that the left hand is dirty, so food should be handled and passed with your right hand. And remember that Hindus do not eat any beef and Muslims do not eat any pork (strict Muslims don’t drink alcohol, either).
In general, businesspeople in India aim to please their guests, so yes/no questions should be avoided because the answer will almost always be ‘yes.’
Japan — Never address a Japanese person by his or her first name; instead, say the last name, followed by the word san (which is roughly equivalent to Mr.). Long, lavish dinner parties lasting for hours are common.
Central and South America — This region features a tremendous amount of diversity from one country to the next. In general, though, Latin Americans are warm and friendly and enjoy entertaining. The main meal of the day is at noon. Wearing proper attire is important — this includes a jacket and tie, if appropriate, even in extreme heat. Punctuality is generally not stressed, as a 30-minute delay is customary.
The Middle East — Specific customs and protocols in the Middle East will vary from one country to the next, but proper dress and decorum between the sexes is critical throughout the region. In Islamic nations, everything stops five times each day for prayers. As a visitor, you are not expected to participate in these prayers, but you shouldn’t interrupt or act impatient while your host prays.
You must also respect the holy month of Ramadan, when no work is done after noon. And remember that pork and pigs are banned, and that it’s generally not a good idea to ask for alcoholic beverages.
Be Sensitive
There’s no question that it pays to be sensitive to these and many other cultural "do’s and taboos" when doing business overseas. This will help you gain the trust and respect of your overseas business partners and, in the process, boost your company’s international business efforts.
BMF&C
| Closer to Home |
| Canada is not only the United States’ largest trading partner, but it’s the second largest country in the world. The country is made up of many different ethnic groups, with most speaking French or English. Canadians are proud of their country, taking exception to exaggerated comparisons with the U.S. To our south in Mexico, keep in mind that most Mexicans appreciate visitors’ efforts to speak Spanish, even if it’s very broken. |
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In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
Andrea M. Gauding, CPA
Manager - Audit & Advisory |
Andrea’s experience includes providing traditional audit, review and
compilation services to clients in a variety of industries including service,
retail, manufacturing, not for profits and employee benefit plans. Over the last
several years, she has placed particular emphasis on development of her
expertise in audits of employee benefit plans.
Andrea joined Bober, Markey, Fedorovich & Company in 1998 after working
at Price Waterhouse for five years. Andrea holds a Bachelor of Science in
Accounting from Kent State University where she graduated Magna Cum Laude and
was a member of Beta Alpha Psi, Accounting Honorary.
Andrea volunteers periodically with many organizations and currently serves
on the Board of Trustees of the Independence Educational Foundation. She is a
member of the American Institute of Certified Public Accountants and the Ohio
Society of Certified Public Accountants.
"For the past 10 years, I have been fortunate to work for a company that allows me to develop professionally while respecting my need to balance work and home. Bober, Markey, Fedorovich & Company values not only the success of our clients but also the success of its people."
BMF&C
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