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Put it on your to-do list

CCR's Charron, who has made profit enhancement his specialty for the last eight years, says there are many ways to implement a review and resulting recommendations.

No matter which way is chosen, though, Charron says it's a commitment to the strategy that sustains the growth.

"The prime challenge is to focus," he says. "Business life is so complicated. People in charge find their time in demand on so many fronts. They're constantly putting out fires. The immediate to-do list only grows."

However, without taking time to look at the overall picture, profits are likely to dip. "To be truly effective, profit enhancement must be part of the firm culture," Charron says. As managing partner of CCR, he has his own method to remind him of the firm's purpose.

A tray that holds 36 index cards sits on his desk. Each slot is staggered so he can see all the cards with only a glimpse. On each card is a message that usually might get lost in the hectic business day. "Get those profits up!" is emblazoned on one card.

"I must look at them 100 times a day," Charron says.

SS&G Financial Services' McNerney agrees that the tone for the profit enhancement culture must come from the top. "Hear new ways of doing things. Generate creativity," she says. "Be open minded to new ideas and change."

In previous years, embracing change and opening up the culture was easier for smaller companies than it was for larger companies. But the implementation of the Sarbanes-Oxley Act, which requires more accountability by public companies, has created an opportunity for larger companies to rethink their cultures and operation if they are open minded enough, McNerney says.

"The most important thing to understand is that the way you're doing things now isn't the only way," she says. "Consider the opportunities. You can't be content with the status quo."

Review from inside out

Hebert of PKF Texas says profit enhancement advisors will review thoroughly a company's situation often before stepping inside to evaluate the particular business. They will examine changes in profit margins, analyze financials, and review industry standards and trends for the last five years. "We have an idea what's up before we go on site," he says.

For example, one company may have a 111-day accounts receivable collection cycle but the industry standard is 80 days. With $1 million in receivables, that 31-day delay can have a significant effect on the company's cash flow.

Process mapping is another tool that may be used in a profit enhancement engagement. "You may uncover something that the owner didn't know was happening," Hebert says. For example, perhaps the accounts receivable department is still giving rebates to a client whose rebates expired six months ago-but no one told accounts receivable to make the necessary changes, indicating a procedure breakdown in the company.

Charron says an investigation may show that sales tax increased to 8 percent, but the company still is collecting 7 percent from customers. The uncollected 1 percent is coming directly from the company's pocketbook. Or perhaps payroll taxes are being submitted late and the company has to pay the stiff penalties.

"When you walk through the process, you can uncover things that have been going on for years," Hebert says.

An important component of any review is asking employees for input and assuring them that the conversations are confidential. "Be candid," Hebert tells employees.

He explains that employees might tell outside advisors of problems that they may not tell the owner for fear of getting into trouble.

He also stresses the need for the development of key performance indicators. "You can't manage what you can't measure," Hebert says.

Dollars and piece of mind

Owners and executives who think their guts are telling them something is wrong in the company, who find surprises keep popping up that hurt the business or who stay awake at night worrying about the company all can find comfort with a profit enhancement review and recommendation implementation, Kretschmar says.

"They give owners piece of mind," he says. Frequently, executives are not as familiar with the processes and day-to-day details of operation. "They're looking at such a high level. They're looking at a balance sheet. But even a bad controller can make numbers look OK.

"The poisons are in the details."

Kretschmar, who developed a CPA Tuneup® seven years ago, says the evaluation really is all about process from the lowest levels. "We spend a lot of time there, not just on financials but we try to find out where the problem is that's ultimately leading to the lost money," he says. Perhaps it's a receivable buried in a liability that is written off because no one ever addressed it.

Financial statements and balance sheets serve as a great foundational resource for investigation. "We dig into the financials. In accounting everything has a home. Perhaps we find something that's a symptom of a procedural problem. We'll go deeper and find why the accounting ended up in the wrong spot," Kretschmar says.

"What you don't know will kill you."

Kretschmar says management ultimately receives a letter that not only highlights the problems discovered but why they exist and what needs to be done to fix them.

The post-review conversations can be tough, Hebert says. But he finds the presentation goes more smoothly when you can quantify what the company's profit and financial picture would look like if the company makes certain changes.

Kretschmar agrees. "Once management understands the importance, they're hooked for life," he says. e