FAILURE IS NOT AN OPTION 400 400 800 300 400 150 Jones 600 50 50 50 Ewing 23 250 200 88 300 Kirk 377...

FAILURE IS NOT AN OPTION The 12 Step Plan to Maximum

Cost Effectiveness

By Committing to Eliminate 10% of Your Costs!

Philip G. Varley, FCA, MBA, CPA

1©Philip Varley 2010

Introduction and BackgroundWhy am I here?

– This really works

– I’ll show you where it has worked – in particular at Ken-Caryl Water District

– You’ll understand why it works

– You’ll want to implement it immediately


My Background

• Chemical Engineer – Imperial College, London

• UK Chartered Accountant, US CPA – Active License, Colorado

• MBA - University of Denver

• International Controller, Finance Director, NYSE traded companies

• Three Venture Capital start-ups - >$50 million

• Since 2001 – Eight successful turn-arounds for private equity groups, to sell portfolio companies for a profit

• Chairman of Ken-Caryl Ranch Water District – 4,000 Customers. Since 2004, a 25% cost reduction and $10 million in reserves.


Results From my Turn-arounds

• Greatest Revenue Increase - $30m - $60m

• Greatest Profit Increase - $3m - $14m

• Most Interesting Loss Reversal - $4m in France

• Greatest Expense Reduction - $12m – 50%

• Most Significant Loss Reversal (for owners)

– $1m loss to $1/2m profit changed a four week foreclosure notice to a sale of company for $2.5 million



• Most Significant Value Enhancement (for VCs)

– $32m sale from $2m profit increase

• Longest

– Three years – but most heavy lifting done within first 6 months!

• Shortest

– 5 months


Most Stressful ?


• Most Stressful

– merger of two bankrupt companies

– each losing $3 million annually

– neither with adequate accounting records (one didn’t have a CFO, the other’s was “creative”)

– subject to numerous lawsuits

• Now a Profitable Entity


SO HOW DO WE DO IT?

©Philip Varley 2010 8

SYNOPSIS OF THE 12-STEP PLAN

COST MINIMIZATION PLANS ARE SIMILAR TO FLIGHT PLANS

FLIGHT PLAN DISTRICT PLAN• Decide where we want to go Improve profitability/Build reserves

• Planning Budget

• Preparation Identification of high expenses

• Take Off Start reorganization

• Navigation Forecast

• Way Points Compare actual to forecast

• Successful landing Budget is balanced without tax/rate increases


SYNOPSIS OF THE 12-STEP PLAN• Where are we going? 13 week cash flow forecast

• How are we going to get there? Receivables and cash collections

• Have we got a map? Organization Chart du jour

• How much will it cost? Payroll – overtime, drug free policy

• How will WE benefit? Benefits

• Will we enjoy ourselves? Travel and Entertainment

• Isn’t it risky? Professional fees and risk management

• Resources Bank accounts

• Replenish resources Purchasing

• Efficiency Margin analysis – by service or customer

• Efficiency Transportation costs

• Free money!! Property, sales and use tax


SYNOPSIS OF THE 12-STEP PLAN• 13 week cash flow forecast

• Receivables and cash collections

• Organization Chart du jour

• Payroll – overtime, drug free policy

• Benefits

• Travel and Entertainment

• Professional fees and risk management

• Bank accounts

• Purchasing

• Gross margin analysis – by service or customer

• Transportation costs

• Property, sales and use tax


SYNOPSIS OF THE 12-STEP PLANTYPICAL ENGAGEMENT SPECIAL DISTRICT - CONTROLLABLE

• 13 week cash flow forecast Most SDs don’t have them!

• Receivables and cash collections Reduce billing frequency from monthly to bi-monthly – 50% admin savings

• Organization Chart du jour Number of staff. Salaries.

• Payroll – O/T, drug free policy Ban overtime (or require time off in lieu) introduce Drug Free

• Benefits Introduce HDHPs/reduce contributions

• Travel and Entertainment Plan ahead

• Professional fees and risk mgmt Self insure/high deductibles

• Bank accounts Pay fees with min balances

• Purchasing Require requisitions

• Gross margin analysis – service or customer Water reconciliations

• Transportation costs Engines off, keep old vehicles, auction excess

• Property, sales and use tax, Unincorporated, tax exempt


Let’s Turn Around Before It’s Too Late!


STEP 1The 13-Week Cash Flow Forecast

• Most districts don’t have one – no idea of short or long term needs

• It is THE KEY to Everything

• It CONTROLS

• Everything is in one place – on one sheet of paper

• All revenues – by customer

• All expenses – as granular as you like

• Daily cash balance


This is the First 4 weeks of a 13 Week Cash Flow Forecast

Classification Week 1 Week 2 Week 3 Week 4

REVENUES (on a cash received basis)

Customer Payments 800,000 1,000,000 250,000 1,400,000

EXPENSES (on a date paid basis)

Payroll 1,207,000 900,000

Rent, Property Tax 50,000

T+E 50,000 50,000 40,000 30,000

Bank Loans 300,000

Professional fees 30,000

Supplies 258,000 230,000 210,000 180,000

Vehicle Operating Costs 50,000 50,000 45,000 40,000

NET CASH FLOW 392,000 (567,000) (45,000) (50,000)

Cash Balance 392,000 (175,000) (220,000) (270,000)15©Philip Varley 2010

STEP 2: Staying Alive – Cash Collections and Revenue Forecasts

• From receivables report, identify best estimates of cash receipts dates

• Call all customers who are delinquent the first day they become delinquent – AND KEEP NOTES AND KEEP CALLING – you have the power of the lien!

• Forecast cash collections beyond current receivables runs by working with historical numbers


Cash Collections and Revenue Forecast

Customer Wk 1 Wk 2 Wk 3 Wk 4 Wk 7 Wk 8 Wk 9 W 10 W 11

COLLECTIONS (Keep tabs on promises to pay)

Smith 400 400 800 300 400 150

Jones 600 50 50 50

Ewing 23 250 200 88 300

Kirk 377 350 400

NEW BOOKINGS (Keep tabs on sales forecast - 4 week collection delay)

Trump 150 600

O’Reilly 200

Hannity 400

Beck 100 100

TOTAL CASH IN 800 1000 250 1400 450 338 1200 250 1050


Receivables Management A Profit Center of Finance

• Critical to maintain frequent contact with customers.

• Keep notes of conversations and promises and FOLLOW UP.

• Don’t let customers go bad. Even if you have to lien only 2% of customers, the time incurred by your admin staff will be 20%!


The Devil is in The Details


Revenue Management –Bi-product of the Cash Flow Forecast• Forecasting by customer lets you see where

problems are.

• Ties to service or staffing needs

• Early warning of trends

• The more accurate you are the more your financing sources will lend.


Expenses in the Cash Flow Forecast

EXPENSES - DETAILED Week 1 Week 2 Week 3 Week 4

Salaries 900,000 800,000

Overtime 161,000

Benefits 146,000 100,000

Workers Comp 8,000 6,000

Air Fare 30,000 30,000 22,000 17,000

Hotels 10,000 10,000 9,000 7,000

Car rent 5,000 5,000 4,000 3,000

Meals and Ents 5,000 5,000 5,000 3,000

Fuel 40,000 40,000 35,000 32,000

Maintenance 10,000 10,000 10,000 8,000


STEP 3: Organization Chart Du Jour• Payroll is a District’s Biggest Expense – MUST keep

track of it.

• As the name suggests – it SHOULD change often –however, most districts have lifetime employees, many who are retired in place

• District probably doesn’t have one

• Do not replace staff who leave. Transfer duties one up, one down, or sideways. KCRWS reduced from 8 to 5 in 7 years.

• This identifies weak players, unnecessary slots

• Leads to immediate accountability22©Philip Varley 2010

STEP 4: The Biggest Expense -Payroll

• Organization Chart Du Jour

• Staff Interviews

• Overtime Ban

• Drug Free Policy

• MBOs

• Benefits – HDHPs to Replace Cadillacs

• Unpaid Time Off/Holiday Shutdowns


Organization Chart


Staff Interviews and MBWA

• Personally interview as many staff as possible. Attitude is far more critical than aptitude. Everyone needs to be on board.



http://www.thespaceshop.com/faisnotophat.html

Staff Interviews and MBWA

“FAILURE IS NOT AN OPTION”

• You will observe working habits of the many by interviewing a few – e.g. “long smoke breaks behind the bike sheds”

• Clocking on at 6 but reading the paper til 7.

• Going out for three hour runs (Boulder)

• Being on site (and paid) for 9 – 10 hours when work could be done in 5.


MBWA – Tom Peters• Here are a few tips to assist you in that same pursuit as you Manage By Wandering Around.

• Appear relaxed as you make your rounds. Employees will reflect your feelings and actions.

• Remain open and responsive to questions and concerns.

• Observe and listen and let everyone see you do it.

• Make certain your visits are spontaneous and unplanned.

• Talk with employees about their passions -- whether family, hobbies, vacations, or sports.

• Ask for suggestions to improve operations, products, service, sales, etc.

• Try to spend an equal amount of time in all areas of your organization.

• Catch your employees doing something right and recognize them publicly.

• Convey the image of a coach -- not an inspector.

• Encourage your employees to show you how the real work of the company gets done.


Immediate Overtime Ban• Most districts get into trouble by failing to control staff –

managers like to be liked. Pay him an annual bonus based on savings against budget/last year

• Board are often unknowledgeable financially, are members of community and want their neighbors to like them

• O/T used by staff as an “entitlement”

• Costs typically exceed 10% of payroll.

• Reflects inability to plan in advance, lack of management discipline

• If some O/T is really necessary, ban will force evaluation of service delivery


UK Miners Strike 1984(picture from BBC archives)


Drug Free Policy - Implementation

• Call your HR attorney now to find out how soon you can introduce one!

• Provide 6 weeks notice of implementation

• Require ALL employees to acknowledge random testing is OK.

• Use third party administrator – no exemptions for management.


Drug Free Policy - Benefits

• Large numbers of least competent staff will resign – self selecting

• Easiest way to reduce headcount without direct firings

• Accident rate will drop

• Productivity will improve

• Workers Comp and Liability Insurance rates will drop – sometimes a much as 50%


Research on Drug Free Work Places

• Cost to Employers of Employees with a Diagnosed Chemical Dependency Problem

• ‚ Alcoholism causes 500 million lost workdays each year. (6)

• ‚ Alcoholics are expensive to businesses in several different ways:

• < Workplace accident rates are two or three times higher than normal;

• < Alcoholics are five times more likely to file a worker’s compensation claim; and

• < Alcoholics are 2.5 times more likely to have absences of eight days or more. (5)

• ‚ Employees diagnosed with a chemical dependency problem in a large manufacturing plant were found to have:

• < Six times the number of absences;

• < Higher incidence of injuries, hypertension, and mental disorders. (7)

• References1. Hoffman, J.P.; Brittingham , A.; and Lar ison, C. (19 96). Drug use among U.S. workers: Prevalence and trends by occupation and industry categories. Numbe r DHH S Publ. No. (SM A) 96-30 89. Rockville, MD: SAMHSA, Office of Applied Studies.

• 2. French, M.T.; Zarkin, G.A.; Hartwell, T.D.; and Bray, J.W. (1995). Prevalence and consequences of smoking,

• alcohol use , and illicit drug use at five worksites. Public H ealth Rep . 110:593-599.

• 3. Hoffman, J.P.; Larison , C.; and San derson, A . (1997) . An analysis of worker drug use and workplace policies and programs. Rockville, MD , Substance Abuse a nd Mental H ealth Services Administration, Office of A pplied Studies, A-2 Analytic Series.

• 4. National Househ old Surve y on Drug Abuse: M ain Findings 1 991 (19 93). Sub stance Ab use and M ental Health

• Services A dministration , Rockville, M D.

• 5. “Drug abuse in the workplace: An employer’s guide for prevention.” EAP D igest.

• 6. Department of Labor. (1998). “Working partners for an alcohol- and d rug-free Am erican wor kplace,” (http://www.dol.gov/dol/asp).

• 7. Bross, M.H.; Pace, S.K.; and Cronin, I.H. (1992). Chemical dependence: Analysis of work absenteeism and

• associated mental illness. Journal of Occupational Medicine 34(1):1 6-19.

• 8. Greenberg, E.S.; and Grunberg, L. (1995). Work alienation and problem alcohol be havior. Journal of Health and

• Social Beha vior 36(1):83-102.

• 9. Delaney, W.P. and Ames, G. (1995 ). Work team attitudes, drinking norms, and work place drink ing. The Journal of Drug Issues 25(2):275-290.


Management By Objectives

• For staff not affected by Drug Free policy!

• Underperforming organizations rarely have MBOs

• Provides accountability, and ensures everyone knows what is expected

• Identifies duplicate or unnecessary work.

• Underperformers will resign.

• Requires a Board who will hold a manager accountable, and a manager who will hold his staff accountable.


STEP 5: Benefits – Make Users Pay, So They Care!

• Cadillac plans should be scrapped

• Introduce High Deductible Health Plans, HSAs and s125 options.

• Will lead to immediate 50% reduction in company’s health insurance premiums.

• To lessen or negate cost increases to staff, savings can be deposited to HSAs/125 plans.


Benefits - Administration

• Perform a reconciliation of users vs. premiums paid.

• Typical large district is paying for more members than they have – as HR forgets to notify administrator of leavers!


Unpaid Time Off, or Extra Vacation

• Staff are often paid to accomplish very little around Thanksgiving and Christmas.

• Recognize this and:– As cash conservation measure, require furloughs i.e.

time off without pay. A one week Christmas shutdown saves 2% of payroll expense.

– Require draw down of accrued but unused vacation and sick time – reducing liability on the books

– perform planned maintenance, required training or internal company meetings during low service periods


STEP 6: Travel and Entertainment Policies

• T+E is a necessary and valuable expense.

• Travel and Entertaining is critical to the success of most private businesses and has some value in districts.

• Abuse of what can be claimed is rampant

• Failure to plan in advance costs the company 100% more than if staff think ahead.

• Lack of control enables these egregious behaviors to flourish.


No Expenses Spared: the inside story of the

Telegraph's MPs' expenses investigation


British Parliament T+E Embarrassments

• The Daily Telegraph’s investigation into MPs’ expenses, which dominated the headlines for six solid weeks in 2009, unearthed what Gordon Brown later described as: “The biggest parliamentary scandal for two centuries.”

• Hogg submitted a claim of roughly $3,000 for the clearing of a moat surrounding his country estate.

• Sir Peter Viggers claimed for £1600 floating duck island• May 21, 2009 ... Britain's MP expenses scandal has

exposed a bipartisan culture of greed which include Kit Kats and a glitter toilet seat. ...


Travel and Entertainment Policies

• The new T+E Policy is this: (thanks to the UK Members of Parliament scandal)

“There are no rules regarding what may be claimed for reimbursement. Every T+E report submitted for reimbursement becomes a public document and every employee is allowed to review anyone’s T+E report”.


T+E - seriously

• T+E often amounts to 10% of a badly controlled company’s expenses

• Purpose of a T+E policy is NOT to reduce travel, but to accomplish the same results at less cost. Usually possible to reduce by 50%

• Plan ahead – Period. No-one should get on a plane without at least 7 days advance planning.

• Too many attendees at same meeting.


T+E Management• T+E reports submitted every 2 weeks• All expenses require receipts.• Dates of expense must match date for which

reimbursement is claimed, i.e. plane tickets reimbursed after travel.

• Educate staff on airline yield management and “always buy on Tuesday, NEVER on Sunday or Monday”

• Rental cars – decline all options• Hotels – ensure free internet, no movies.• All T+E reports MUST be approved by CFO

– stops frivolity, provides data for who doesn’t care about the district.


STEP 7: Easy Expenses –Professional Fees - Audit

• Do you really need a Big firm?• Talk to current auditor about where most of their time is spent –

likely to be in areas where YOUR work papers or documentation are inadequate.

• Identify where costs could be reduced• by YOU providing accurate work papers• resolving issues ahead of time• keeping abreast of legislation affecting you

• If needed, perform after traditional “busy season” i.e. after April 15 so fees can be at “off-peak” rates.

• Go out to bid! KCRWS pays less than $10k.


STEP 7: Easy Expenses –Professional Fees - Legal

• It is a fact of life that badly managed districts don’t manage their costs. They fail to control who calls the outside counsel and for what. Some attorneys recognize this and take advantage of the ability to spend a lot of time on this client.

• Identify one single point of contact between district and outside counsel – CFO or Manager should be the filter.

• Review all past invoices to identify what was sent outside that could have been dealt with internally. Do not send outside until all internal avenues have been investigated.

• Question any “make work” by the attorney such as monthly “review of files” or two attorneys working on same issue when only one is required.

• Do not involve attorneys in every detail – perhaps they should NOT attend Board meetings.

• Do you need to run every decision by your attorney? What is the risk?


Risk Management – Insurance Premium Reduction

• Talk to Insurance Broker – what have been high cost areas in past?

• Drug Free policy will have immediate reduction• Maximize all deductibles – saves 20 – 30%.• Eliminate comprehensive coverage on old vehicles.• Ensure Ins Co has all Fire Protection drawings!• Truck drivers should not be allowed with DUIs, and causing

accidents should lead to termination.• Introduce safety courses, policies, training and defensive

driver.• Attend professional course to understand how insurance is

priced.• Go out to bid!


Risk Management – Workers Comp

• Ensure all employees are categorized in lowest applicable category

• Work with WC provider to enjoy all additional savings, such as “codifying a safety plan”

• Many times, significant premium reductions can be had by prepaying for the year.


STEP 8: Bank Accounts/Interest Expense

• If working on a revolving line of credit, ensure cash management account is a sweep account to reduce borrowing costs EVERY night.

• Ensure borrowing costs commensurate with risks and today’s low interest rate environment – may be possible to shave 3% off costs of loans more than 3 years old.


STEP 9: Purchasing

• Ensure all prompt payment discounts are being taken. 2% 10/net 30 is a 36% per year ROI.

• Look at inventory levels – are they too high because of “bulk discounts”?

• Are suppliers too cozy with purchasing manager?

• Are office supply expenses greater than they would be by going to Office Max?

• Ensure that your “tax exempt” status is ALWAYS used.


Office Expenses

• Photocopiers – lease vs buy? Having too many?• Use tax (personal property) reduction – you are

probably paying on non-existent 20 year old equipment! Your old assets have no book value, but the tax man never writes them off!

• Lights – turn them off!• Outside catering and bottled water – do you

really need them?• Little things add up – but biggest saving comes

from showing all employees that all expenses matter – it’s attitude!


STEP 10: Gross Margin Analysis Case Study – Water Purchases

• District purchased water from a master distributor, then resold to customers.

• Historic margin analysis showed 2% line loss over 8 years.

• Perfectly good functioning turbine meters were replaced by master distributor. Differential went to 17%.

• Three year review led to significant compensation from master distributor, and replacement of malfunctioning “new” meters.


District Specifics – Parks and Rec

• Management of Dispatch yard – old management had allowed early clock on (7 am), and tardy dispatch – often not til 11 am!, guaranteeing very little work accomplished and overtime payments.

• Changed manager to a “hardass”. Staff clocked on at 8 am, loaded vehicles, and left to job sites.

• Introduction of real time GPS reporting identified staff were on the job, and identified long lunch breaks.


STEP 11 – Transportation Costs

• WalMart is aiming for 50% reduction in 5 years, UPS has seen 20% reduction.

• Do not turn on truck’s engine until ready to depart – 33% increase in “efficiency”.

• Assign one truck to one driver and keep track of maintenance/fuel efficiency by driver. 100% variability is not uncommon – worst performers leave.

• Fuel management card – prevent filling up of personal vehicles!

• GPS tracking for location/speeding purposes.• At fault accidents lead to termination.• Create routes which minimize left turns.


Capital Expenses - Vehicles

• Buy, never lease (leases price for 12,000 miles per annum, most SDs do about 5,000).

• Buy used – 1 – 2 years old.

• Keep until they fall apart – 20 years or more. Most vehicles today good for 200,000 miles, but no need for “absolute’ reliability as most journeys less than 5 miles from base.

• Require drivers to pay for any damage they cause.

• Maintain pride in the vehicle fleet


Capital Expenses – Capital Projects

• Seek bids from 8 + vendors.

• Determine what you can do yourself – e.g. supervision

• Hire sole practitioner engineers – people who probably have been let go with many years experience from the well known firms.

• Do NOT allow change orders – this is where unscrupulous vendors will gain 20 – 30% on their bid.


Summary ResultsAll numbers in $thousands

Car wash Chemicals Transport Consulting

REVENUES $40M $10M $36M $10M

Receivables 400 50 250 600

Staff Reduction 500 920 5000 2500

Overtime ban 225 100 1125

Benefits change/admin 192 200 200

Insurance 50 10 100 20

T+E 720

Vehicles 108 80 300

Prof fees 230 170

Purchasing/pilfering 400 400 100

Interest 56 80

Rent/tax 100 500

TURN-AROUND $2.261M $1.56M $7.055M $4.81M


Summary ResultsAll numbers in $thousands

Software Info services Billing Water District

REVENUES $30M $60M $12M $3M

Receivables 400 500 250

Staff Reduction 120 60 8000 250

Overtime ban

Benefits change/admin 20

Insurance 200 50 20

T+E 120 2400

Vehicles 60

Prof fees 100

Purchasing/pilfering 360 250

Interest 90 50

Rent/tax 3000 500

TURN-AROUND $4.03M $3.82M $7.055M $600k


CONCLUSIONS• Badly managed districts all suffer from the same problems.• The 12-Step plan template can be used for all.• If you believe Apollo 13, that Failure is Not an Option, then

they can be saved from needing a tax increase• Staff can be reduced by self selection – avoids firing from

the hip!• Virtually every problem arises through lack of controls• Implement controls over visible activities – T+E, vehicles,

overtime, and the rest will follow.• Plan, follow up, and adjust.

LEADS TO SUCCESSFUL LANDING!


Philip G Varley, FCA, MBA, CPAThe Barrington Group Inc1 Mountain Cedar LaneDenver, CO 80127303 946 [email protected]

Contact Information

Philip G Varley, FCA, MBA, CPA

The Barrington Group Inc

1 Mountain Cedar Lane

Denver, CO 80127

303 946 1941

[email protected]


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