توضیحات جورج

BEC : Finance - George

Hello, it’s George here and I’ve got a commentary lesson about the financial organization or financial operations or finance in a company, whichever way you want to look at it. I’d like to talk a little bit about kind of the big picture, the overall view of the finance organization.

I mentioned in the marketing commentary that they were very important and very, very powerful in a company. Well obviously, the financial operations, the finance organization is also very important and very powerful. I’m going to step back and say that every organization in a company is important, but when it comes to power - finance and marketing. Those are the two that generally hold the power in your large corporations.

In fact, there are many, many power struggles between the chief financial officer and the chief marketing officer within a company trying to get the edge and make their decisions be what rules the company.

We said that finance, their main function is to manage and control the company’s money, manage and control the company’s money, and I think I touched a little bit on the organizational structure. There’ll be a finance executive and the controller, which is the main accounting manager, will report to them. The accounting folks are concerned about accounting rules, company policies, rules as it relates to stockholders and dealing with their money, banking policies, accounts payable, accounts receivable and more and more and more government regulations.

On the finance side one of their biggest and most important things that they’re concerned with is a budget. By that I mean the expense budget, how much can the company spend. Of course, they’re also concerned and involved in the borrowing aspects because most big companies will borrow and they’ll borrow a lot of money.

They’re interested in the investment portfolio of the company. They’re the ones who make the decisions on what to invest, when and how much.

I guess the net of all of this is that they’re concerned with the cash flow - the money coming into the company and the money going out - because the formula they’re really striving to improve on is what I could R minus E equals P. Revenue minus expense equals profit. Well, the finance organization focuses in on the last two pieces of that - expense and profit.

There are a few companies, and I know that IBM is one of them, who have a little different formula. Their formula is R minus P equals E. Revenue minus profit equals expense. Now, think about that one for a minute. That’s probably a pretty good way to operate your business in your own personal life. Revenue minus the profit that I’m going to have at the end of the year equals the expenses --what I can spend during the year --interesting concept.

All of that boils down into, as I said, probably one of the key items for any company the budget, the expense budget, and there a couple ways that comes about depending on the company or maybe just depending on which reorganization took place in the last six months or 12 months. There’s what you would call a tops-down budget and there’s a possibility of a bottoms-up budget.

Well, a tops-down budget probably goes back to the revenue minus profit equals expense. That’s the kind of budget where the upper level management in the finance organization will decide this is how much we’re going to spend this year as a corporation in total. Then they’ll pass that down to the various functions within the company or pieces of it, let’s put it that way, their piece, and then those functions will pass it down to divisions. They’ll pass it all the way down until it finally gets to the department level.

Now, that’s kind of painful process, particularly the lower you are on the food chain. In other words, the lower you are in the chain of command. Meaning those of you that are down at the department level, somebody hands you a budget and says this is what you’re going to live with. Well, that makes for a lot of work for the department manager to try to meet that budget.

The one I prefer and more and more companies are using in some way or other is a bottoms-up approach. That means each department submits what they want for a budget. Of course, there’s a lot of scrutiny that goes on and challenges and so on to that budget, but the bottom line here is that the department should know what they need to operate on. So they’re going to submit the budget and they’ll pass it up the chain of command all the way to the top and then it will come back down. Back and forth and so on, but that’s a much better process, much better process.

What are the things that make this finance operation important and powerful? Well, they’re the ones that make the recommendations on how to reduce expenses or in some cases, as I mentioned earlier, how to increase expenses. Those cases are usually over on the manufacturing side, maybe on the marketing-advertising side and depending on the new products that might be coming out they might even increase the budget on the sales side.

By enlarge, for most of the rest of the company you’re looking at recommendations or ways to reduce expenses. The easiest that I’ve seen in large corporations is they go after what you call line items, line item expense. By line item expense I’m just talking about categories. A line item expense is travel. That’s a category. A line item expense is supplies. That’s a category. Salary is a line item expense.

So the recommendations usually follow the lines of we’re going to cut discretionary expense by 10%. You ask, what is discretionary expense? Well, there are really two basic kinds of expense for a company. There are fixed expenses. Fixed expenses are things that you can’t really get out of easily or quickly. Probably not in the next 12 months which is represented by this budget can we get out of the so-called fixed expenses.

Example: rent, mortgages. In other words, money we have to pay to rent a building or buildings that we own that we borrowed money to pay for. We can’t get out of those.

Utilities, stockholder dividends, those are fixed expenses and, to a degree, people are a fixed expense. Not entirely, but for every person that you’ve got there is a series of fixed expense; wages, benefits, taxes and even rent. I mean each individual occupies a certain amount of space. If you didn’t have that person you wouldn’t need that space.

So the attack, if you will, to reduce expenses gets focused on the discretionary expenses. The big ones that I remember in the big corporations all the way down to the small businesses that I work for, travel, supplies, telephones, meetings. Those are the first things that are going to take the cuts.

They start out with meetings. No more coffee and donuts at the weekly meetings.

Doesn’t sound like much, but what the heck? It’s a few bucks here and there. Those are the ones that are generally attacked and those are attacked more times than not in a 10% fashion. By that I mean what’s passed down from the top of the organization is we’re going to cut our discretionary expenses by 10%. Now, when things really get bad, as you’ve heard about and seen for yourself, is when the big cuts have to take place and when the big cuts have to take place people are the things that get cut.

If you remember in one of our lessons I mentioned that the people expense, the expense to have people on the payroll is about 60% of a company’s budget. That’s because of the wages, the benefits, the different kinds of taxes and just on and on and on. People are very expensive, so when a company cuts as I saw the other day in the newspaper, I don’t even remember who the company was, they’re going to cut 10,000 people.

Obviously, this is a very big company. That’s a lot of people, but that is one heck of a lot of money saved too. So there’s good and bad in there. From the standpoint of the company and the standpoint of the stockholders, well that’s good. From the standpoint of 10,000 people, that’s not good. That’s also not good for the economies where those 10,000 people live, but that’s an argument for another session I would suppose.

So you ask, what has this all got to do with me? Well, I don’t care what position you’re in in the company, you should be and I hope you are or at least getting to that point where you’re managing your job, your department, whatever organization you’re in, as though it was your own company.

What does that mean? That means you being the most efficient, effective and productive person you can and constantly look for ways to improve the bottom line. The bottom line being R minus E equal P or R minus P equals E. I don’t care which way you want to look at it, you’re trying to do something about that E - expenses.

Believe me. I don’t care what company you’re in, how big it is and what your job is, every little bit counts. Every little bit counts. If everybody in the company made an effort to save a dollar a day, just a dollar a day, you pick the number of the size of company you want and add it up, how much would that be? You’ve got a company with 50 people, $50. You’ve got a medium-size company with 500 people, $500 a day. You’ve got a really big company, something on the range of let’s say 5,000 employees, $5,000 a day.

That’s a lot of money saved. So think about that. Manage your job, manage your function, everything you do as though you were the owner of this company. How would you do it? How would you mange it? Manage it as if it was your own company, okay? I think that’s about all I’ve got to offer right now, so I want you to listen, listen, listen. As AJ keeps telling you, 14 days is the optimum that we want you to do this. It’s the best way to do it. I hope this lesson has been of some value and some interest to you. Until next time … The End.