Maximising the sale value of your business

<br /> Brian Bastible

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Brian Bastible

Business owners do not normally think about the value of their business on a regular basis. Most owners are not looking to sell and are more concerned with the day to day running of the operation.

However, if you were approached with a view to selling, would your business be in the best possible shape to maximise your sale value? Would it meet your long term goals?

In Auditel’s experience across 3000 clients, we have reduced client business overhead costs under management by an average of 21%. This tells us that those overhead costs were too high by on average 21% and this has a direct impact on the value of those business.

In a sale, businesses are typically valued as a multiple of net earnings; the multiple paid by the acquirer will vary across industries and size of business. To demonstrate the issue, we will use an earnings multiple of 5. The simple table below demonstrates the impact on the value of the business of a 10% reduction in business overhead costs. In this case, the value of the business is increased by 12.5% as a result of a 10% reduction in overhead costs.

In the event of a sale of the business, this 12.5% increase in sale proceeds is lost to the business owner. There is every chance that the purchaser will realise this additional value within their business. The solution is continuous management of all overhead costs but for many business owners, the knowledge, resource and time for this level of cost management are what prevent them doing it. They do not realise that their costs are too high, otherwise they would take action. Alternately they know it but it is on the list of things that never get actioned.

This kind of proactive cost management cannot be implemented once an approach has been made by a prospective buyer. The buyer will value the business on current and historic earnings before any cost management can be undertaken. It is therefore important that overhead cost management is a continuous and ongoing process.

It is not just in the event of a sale, there are other times when a higher business value may be important, for instance when the business is borrowing, higher earnings will help support higher potential borrowing capacity. Higher earnings will free up cash flow for investing in activity that can lead to revenue growth or support higher dividends to the owners.

The starting point is an exercise to properly benchmark your current overhead cost profile.

For an Auditel Strategic Cost Review contact Brian Bastible

What is Strategic Cost Management?

<br /> Brian Bastible

Posted by:
Brian Bastible

Strategic Cost Management is a term that is regularly used in business but what does it mean?  A client asked me the other day what Strategic Cost Management is, so I gave my usual reply but on the way home thought, that is a really good question.

As so often is the case, the words themselves tell us the meaning but we just need to stop and think about it.  I picked up these definitions from research but I think they work well.

Strategic

Relating to the identification of long term or overall aims and interests and the means of achieving them.
So there must be a purpose, an end game or a place where we are trying to get to.  Crucially we need to understand what the strategic goal or objective is.

Cost

The expenses that we necessarily incur in the pursuit of those strategic aims.
In business this can normally be broken down into 3 broad areas;
1. The cost of core functions or operations. What we must spend in developing and delivering our product or service.
2. The cost of acquiring, retaining and growing our customers. Cost of revenue acquisition.
3. Activities that support core operations and customer activities for example, IT, Telecoms, Accounting, General Administration, etc

Management

The process of reaching organizational goals by working with and through people and other organizational resources.
Management has the following 3 characteristics:

1. It is a process or series of continuing and related activities.
2. It involves and concentrates on reaching organizational goals.
3. It reaches these goals by working with and through people and other organizational resources.

Strategic Cost Management is the ongoing process of ensuring that an organisation has the right partner suppliers, at the right service level and at the right price to ensure that the organisation can deliver its long term goals and objectives.

It makes so much sense when it is described like that so all businesses must be doing this. Surprisingly no, separate research by Management Today and Accenture shows that only 30% – 40% of organisations consider their own cost management activities to be strategic.

Why? Time, knowledge, resources, tools?

The interview by Management Today with Chris Allison, CEO of Auditel addresses some of these questions.

‘Of the organisations asked, 70% had no cost management strategy in place’

microscope-web01According to a survey conducted by Management Today, on behalf of Auditel, Ireland’s leading cost management consultancy, ‘70% of all organisations asked, have no cost management strategy in place. Yet 8 out of 10 have it on the boardroom agenda. Over 65% of them now recognise that, carried out by experts, strategic cost management really can accelerate performance, improve efficiency and gain competitive advantage’.

Chris Allison, Auditel’s Managing Director, says: “If your organisation is one of those 65%, who recognise strategic cost management expertise, we can provide exactly what you need. Our highly-trained consultants come from a wide range of management and professional backgrounds. Each of them can offer specific knowledge and insights into the many different aspects of cost management. This has been most beneficial to their clients.

“Our clients have found enormous advantages in working with us as a trusted independent member of their management team. These include:

  • Massive and immediate time-saving as in-house resources are freed up to concentrate on the core business.
  • Sustainable profit improvement.
  • Up-to-date, accurate and detailed cost management information.
  • Peace of mind, as we continue to keep a watching brief and a non-disruptive service that runs quietly and efficiently in the background.”

Chris Allison, concludes: “Keeping over 80 business costs under control can be a challenge. Every month, year in and year out, we are saving tens of thousands of pounds for small, medium and large organisations. If you would like to have peace of mind, amid spiralling costs, start with our Auditel Business Health Check. We can include a Financial Health Check as well for you.”

PSO Levy to increase by up to 85% on 1st October 2014 – Is your Business ready to offset the increase?

<br /> Declan Quinn

Posted by:
Declan Quinn

If you are a business leader / owner responsible for a medium or large electric supply for your company, you may have seen the recent communication from the Commission for Energy Regulation (CER).

The CER has just announced that from 1st October 2014 the electricity PSO Levy will increase by up to 85% for medium to large businesses. Conversely, if you pay for a smaller supply you may be experiencing “PSO apathy” and be thinking these increased charges don’t affect me. Think again; small users will see their PSO levy increase by up to 71%.

What is PSO?

The Public Service Obligation (PSO) was introduced in Ireland in 2002 post implementation of competition in the electricity market. Purpose of the PSO levy being to compensate ESB Networks for the additional costs incurred in their endeavors to produce electric from peat and other environmentally friendly (wind, hydro & CHP) forms of energy.

What is the relationship between PSO levy and Maximum Import Capacity (MIC)?

The foundation of the PSO levy charge is the Maximum Import Capacity (MIC). The MIC is calculated based on the total electrical load installed at your premises and the timing of this load. In non-technical terms, your premises MIC is like a contracted order between your business and ESB Networks. You are telling ESB Networks to always make available your MIC requirements. These requirements are determined as the upper limit on your total electrical demand. The MIC needs to be high enough to meet demands of the business.

Regulator’s role in determining PSO Levy?

The Commission for Energy Regulation (CER) determines annually what the next year’s PSO levy will be. The key question for businesses is why do we have to incur such a large increase this year and what are the drivers for this increase?

  • Lower wholesale electricity prices. Average wholesale prices have dropped by 11% from original forecast. The means that electric generation plants will need more PSO revenue to cover their costs.
  • Increased generation of renewable energy. Hence more PSO revenue is needed to cover cost of generation

How will the PSO levy increase apply to my business?

There are two business categories affected by the increase in PSO levy.

  1. Small commercial customers with an MIC <30kVA. For this group the PSO levy will be €18.47/month as opposed to current €10.82 / month.
  2. Medium and large energy consumers with an MIC >30kVA. Medium and large customers will now pay €2.85 / kVA as opposed to current €1.54/ kVA.

Note:– for medium and large electric consumers the MIC and PSO charges can account for up to 11% of your monthly bill at current rates. Under the new PSO levy from 1st October 2014 the new charges will now account for on average over 14% of the monthly bill. In monetary terms, let’s assume you have a medium supply with an MIC of 350kVA. For your business the annual cost increase will be €5,500 (i.e. the business must find an extra €458/month to fund the increase in PSO levy).

In short the PSO levy charges are unavoidable; they are essential to pay for investment in renewal energy. However, there are ways to reduce the impact of PSO levy increase on 1st October 2014.

  1. Use Less Energy. An obvious answer – surprisingly overlooked by most businesses.
  2. Review your MIC. When was the last time someone measured your actual electrical load requirements v’s your planned loading and contract to ESB Networks?
  3. Perform and Energy Audit. Energy audits can identify some “low hanging fruit” which could potentially reduce your loading. This would then lead to reduced MIC and would lower the businesses’ PSO charges.

When was the last time you reviewed and took action with your electric fixed charges like PSO and MIC?

As Winston Churchill once said, “ I never worry about action, but only inaction”.

Inaction is not an option when your energy costs are rising. Contact me to discuss your options to try and offset this increase.

 

How many companies do you need to manage over one hundred business expenses?

Answer: With Auditel, you only need one!

microscope02-300x260According to Deloitte’s third biennial cost survey 2013, 76% of respondents expect their company to reduce costs over the next 24 months. However, they also found that the failure rate for cost initiatives climbed to 48%. This means that nearly half failed to achieve their goals.

Chris Allison, Managing Director of Auditel, the UK and Ireland’s leading cost management consultancy, explains, “Keeping over one hundred business expenses under control is not that simple. These days, cost, purchase and supply management is recognised as being a complex business skill.

It requires specialist training and sector specific experience, which most companies do not have available in-house. Diverting key personnel from their core roles, to managing business overheads, isn’t the best use of their time or the organisation’s money.

“Many companies are turning to outsource this discipline and over 3,700 have chosen Auditel. For the majority of our clients, one Auditel consultant is able to offer effective cost management in most expenditures. If extra help is needed, they can draw from a team of over 200 specialists and a host of market-leaders in other key sectors.”

Why slashing costs will only get you so far

Companies that are positive about cost management and see it as more than simply making savings are the ones will be in pole position to take advantage of economic recovery, according to a recent survey commissioned by Auditel and Management Today.

Taking part in a round table discussion on how companies can make savings, Chris Allison, MD of cost management specialist Auditel, said: ‘The major challenge will be moving from a simple cost reduction exercise to more strategic cost management. it’s not just a matter of looking at historical data, tendering that out and then getting a better result. Cost reduction is the first part of the process, but you need a strategy in place to make sure you monitor those costs on an ongoing base. You need the right tools and knowledge base.’

He added: ‘Most businesses focus purely on a cost reduction exercise. That means that they get the initial savings, but these are not monitored, and you start actually getting price increases. These costs go flooding back into the business and all their hard work comes to no avail.’

Cost Managing for Performance

When organisations need to reduce costs, staff cuts can often be the first solution. However, evidence suggests this can result in a reduction in business performance, falling service levels and damage to reputation, not to mention a demoralising effect on staff.

Seán Harnett argues that reducing the size of the workforce should be the last resort. The first course of action should always be to look under the bonnet of an organisation to see where costs can be reduced and efficiencies made.

Seán has given his expert advice to organisations wishing to sensibly and vigorously manage their business costs in an article published by the Little Island Business Magazine.

Read Cost Managing For Performance

Mean, Lean and Green Energy Management

The cost of energy affects every organisation from charities and the voluntary sector through to manufacturing and leisure businesses.  Management of this essential business cost is a minefield for those without access to the right skills and expertise.

Chris Allison, Managing Director of Auditel, a cost management consultancy, argues that organisations should be turning to professional consultants for energy management advice.  He suggests that many organisations could witness typical savings in excess of 30% on their energy costs, not to mention improved procurement processes and business efficiencies.

Auditel has pioneered effective energy management providing clients with solutions to all of their needs, from procurement of services and management of consumption through to complex energy management programmes using the latest renewable sources.

According to Allison: Energy is costing businesses hundreds of millions pounds annually and squeezing profitability for enterprises of every size. They need to find a way to sensibly and vigorously manage these costs.  As cost management experts we combine skilled people with state of the art analytical tools, industry knowledge,  buying power and detailed process in order to get the best results for our clients.

Mean, lean and green describes very clearly and simply the three step Auditel energy management process.

Allison explains: We call step one mean because its all about setting the price in order to achieve a return on investment. Energy tariffs and procurement can be extremely complex.  We examine and benchmark energy procurement to identify areas of improvement then manage the whole process on our clients behalf.

Stage two is the lean phase. Having the right energy management strategy in place can have a significant impact on organisational performance. Our specialists analyse  consumption and review  energy requirements before providing and implementing a detailed strategy that meets the energy needs of the client.

Finally comes the green phase. Renewable energy is not only environmentally friendly, but it can also be a potential revenue source.  Our experts can advise on every aspect of this complex topic from funding options through to selling excess energy back to the supplier.”

Organisations continually need to examine their energy costs on a regular basis. With typical energy savings of 25% being achieved by implementing an energy management strategy, it is surely time to consider outsourcing to a professional consultant?

A Cut Too Far – Cost Management For The Retail Sector

The Irish retail sector is well accustomed to conducting cost reduction exercises since the world imploded in the autumn of 2008. In troubled times, when organisations need to reduce costs, a staff cull can often be the first solution. However, evidence suggests this can result in a reduction in business performance, falling service levels and damage to reputation, not to mention a demoralising effect on staff. Declan Quinn, a Cost Management Consultant of Auditel (Ireland) Limited, explains why.

Quinn believes that reducing the size of the workforce should be the last resort and argues that the first course of action should always be to look under the bonnet of an organisation to see where costs can be reduced and efficiencies made. So, what are the options available to members of Retail Excellence Ireland?

Beyond staff costs, it is also a fact that all organisation need to spend money on essential business services in order to exist. Premises-related costs, fixed and mobile communications, IT, utilities and finance such as insurance and banking charges are just a selection of essential overheads. Without these services, most retail business would find it very difficult to operate.

According to Quinn, essential business services are costing Ireland’s retail sector hundreds of millions Euros annually and squeezing profitability for organisations of every size. Given the vast level of expenditure involved, organisations need to find a way to sensibly and vigorously manage cost. Clearly, this involves identifying suppliers and service providers and assessing their respective offerings in terms of performance, price and service levels offered.

Whilst this may, at a first glance, seem blatantly obvious, many organisations believe they ‘have people who look after that’. Unfortunately, according to research under taken by Deloitte in March 2013, the biggest barrier to effective internal cost reduction cited by respondents was a ‘lack of understanding.’

It is often the case that department managers, whose experience lies elsewhere within the organisation, are routinely left with the responsibility. Is it right to make an assumption that these individuals hold the necessary skills to enable them to implement an effective and sustainable cost management programme? Surely, the answer is of course no. As a consequence, many opt for the apparent ‘cheapest supplier’ option adopting a purely headline cost model. This may appear to be a logical approach, but it is fundamentally flawed as it fails to take into account a wide range of additional factors that contribute to what Auditel term as the total cost of purchase. The bottom line appears to be that many retailers are spending more money than they need to on essential costs and implementing woefully poor cost management strategies.

The appointment of an outsourced provider of cost management services is becoming an increasingly popular option and one adopted by many members of Retail Excellence Ireland. Companies including Eddie Rockets, Maxi Zoo and La Croissanterie have engaged with outsourced cost management consultancies like Auditel to review the total cost of procuring goods and services. Cost management companies like Auditel can use their independence and experience in the market place to help them make intelligent effective purchasing decisions and implement professional cost management strategies.

Auditing and benchmarking procedures are an important aspect of cost management consultancy. Best practice should include a comprehensive, in-depth review of current essential service expenditure with key performance data being identified. Advanced analytical tools that are specially designed for cost management are also essential as they enable the fast and accurate analysis, monitoring, benchmarking and management all areas of expenditure.
The key to maintaining best value purchasing and supplier management is to be consistent.  It’s not just a one-off exercise and should be considered as an ongoing activity to realise maximum benefits.

Cost managing for performance may well also be the answer to realising untapped profitability.  For example, if we take an organisation that has a gross profit margin of 25 per cent. It engages with a cost management consultant identifying €100,000 of potential savings across essential business expenditure areas. In order to generate this additional profit through sales it would have to increase turnover by €400,000.

Retailers continually need to examine costs on all fronts. However, a forward thinking business can go a long way to countering the potential problems that can occur by embracing and adopting a robust and professional approach to the fast growing discipline of professional cost management consultancy.

Energy Management

Energy Management is a crucial part of any organisation and more and more are really getting up to speed with this area as a means to reducing their spend. Like any account, be it big or small, it needs to be managed carefully. From tendering, to measuring, establishing results and reporting. The problem some face is that the resources within their organisation are not easily available to carry out such ongoing activity. They also are not up to speed with current industry practice and developments. That is where Auditel can help. We can be your outsourced energy management consultants.

From Energy Audits to tendering and account management you can have it all with no full time salary additions or extra drain on present resource. Our ongoing training and market knowledge ensures you get the latest technology in helping you to reduce your emissions, carbon footprint and your costs.