IOMA -- How CPA Firms Can Help Clients Achieve ‘Prudent Growth’

The economy may be better, but controllers who responded to a recent IOMA survey said containing costs remains a central initiative precisely as business expands. Clients recognize the economic good times, but they want to be smart about their money now. Their specific control quests present opportunities for CPA firms to help them realize what they term prudent growth.

The 250 controllers surveyed by IOMA said four of the five leading cost-control strategies actually reflect efforts to spend efficiently and effectively during an economic expansion. This is a major change from 2005, when the leading priority revealed in IOMA’s survey was containing rising costs for health benefits.

Where your clients want to save the most. The survey presented 19 cost-control options to controllers and asked them to select five "categories in which you plan to focus on controlling costs in the next year." Key point: Since respondents voted for five cost-management options, the survey captures broad approaches for restraining spending, not magic-bullet solutions.

This year, the five cost-control areas that respondents mentioned most frequently were purchasing/materials costs (cited by 61%), health care benefits (45%), inventories (45%), manufacturing/production (44%), and capital expenditures (42%). Costs in three of these areas—purchasing, inventory, and production—are largely volume-driven in today’s low-inflation economy. Also, the level of capital expenditures rises when managers expect a decent return on their investment. These are, in other words, cost issues that controllers face as their companies expand.

In contrast, rising costs for health care benefits are a product of employment levels and the power of vendors to stick to their price increases—a cost increase that employers face this year no matter how well (or poorly) their business is doing.

Differences between large and small companies. The accompanying table shows that company size affects the broad approaches that our respondents now take toward cost control. Most of the surveyed controllers work at smaller organizations with fewer than 250 employees. A small percentage of the larger-company participants represent substantial sized businesses, with several employing 5,000 people or more. Important contrasts between these two survey groups include:

Controllers at larger companies are principally concerned about controlling expenditures in today’s booming economy. When employment surpasses 250, the top three cost priorities for these controllers are purchasing/materials (62%), inventories (49%), and manufacturing/production (48%). These managers are looking for ways to keep the costs of maintaining or expanding corporate sales within budgets.
Controllers at smaller companies are still challenged by health care costs. More than 57% of these respondents are focusing on the cost of medical benefits, about the same as the percentage (60%) concerned with purchasing/materials costs. While this is down nearly 13% from 2005, these respondents demonstrate they still have a way to go before they achieve satisfactory restraint in health plan costs.

Where clients are struggling in specific client groups.

Expansion-based costs at larger companies. The focus on effective and efficient spending during an expansion is evident in several remarks from survey respondents at midsize and large companies. In some cases, these comments demonstrate the fact that purchasing and materials costs, inventory levels, and manufacturing form a continuum where manufacturers sink most of their costs.

"Materials costs are our largest expense, and holding inventory is expensive," said the controller at an office furniture manufacturer. "So we’re working with steel suppliers on different material and delivery options to lower costs. We’re also moving from MRP-driven buying to Kanban and visually controlled buying. Finally, we’re implementing lean manufacturing to eliminate waste."

In contrast, other respondents tended to focus on just one or two elements of this order-to-product cycle. For example, a vice president of finance at a light fixture business in Ohio observed: "We’re rolling out lean manufacturing. Already, we’ve seen a 25% reduction in inventory."

Adjustments in health care. Health care is a second tier cost issue for our larger respondents this year, with 41% identifying it as a top-five focus. Respondents explain this surprisingly low ranking by indicating that 2006 will be a year of fine tuning, not coverage upheavals. No large-company participants said they would shift significantly more costs to employees or offer high-deductible plans this year. Instead, typical remarks from this group were:

—"We’re constantly looking for ways to control these costs, such as using RFPs to review vendors or adjusting our self-insurance." CFO, manufacturer, 5,000 employees, Alabama.

— "We’re using a new third-party administrator to generate better usage information. We’ve begun to provide annual health screenings to all employees with a cash incentive to participate. We’re focusing on healthy-living messages, lifestyle choices, and other preventive measures." Controller, distributor, 1,000 employees, Indiana.

Different mix at expanding small companies. Smaller-company respondents’ top-three volume-driven cost concerns are purchasing (cited by 60%), capital expenditures (47%), and inventories (43%). Their concerns with purchasing and materials costs are very similar to those being experienced by their larger colleagues. For example, several respondents remark that materials costs are their biggest expense, making a focus on this area a simple matter of competent management.

Meanwhile, other respondents discuss approaches to managing materials costs that are valuable regardless of company size. For example, the controller at a small service business in New Jersey observes: "We’re using an RFP process to find a vendor with lower prices. There are risks, but savings may be $1 million plus per year."

Even so, some of these smaller companies show basic problems in their purchasing programs that probably reflect growth getting ahead of proper controls. For example, a controller at a service business in Massachusetts commented: "We suffer from an oversupply of auxiliary products and misuse of shipping services. We have begun to work with managers to improve their order quantities and to educate all employees on the proper use of overnight delivery services."

Health care costs. These continue to trouble controllers at small businesses, although less so than in 2005, when 70% of respondents deemed this area a cost focus. Comments from these respondents indicate this is their second-rated cost focus because they still have cutbacks to make, as illustrated below:

—"We’ll probably have to cut back on our benefit levels, since premium increases have far exceeded salary and wage increases." Accounting manager, education, 100 employees, Texas.

— "We are considering moving to a high-deductible plan and increasing employee out-of-pocket costs. The business owners are resisting this, even though the savings would be welcome." Controller, services, 80 employees, Ohio.

— "We’re considering capping employer contributions, restructuring deductibles, and increasing copayments. Estimated cost savings would be $1,430 per employee per year." Controller, education, 200 employees, California.

Most Critical Cost-Control Areas for 2006, by Number of Employees
	Overall		Fewer Than 250 Employees		250 Employees or More
	2006	2005	2006	2005	2006	2005
Purchasing/materials costs	60.8%	51.5%	59.6%	53.2%	62.0%	48.9%
Health care benefits	45.3	55.7	57.4	70.2	40.8	42.6
Inventories	45.3	30.9	42.6	23.4	49.3	36.2
Manufacturing/production costs	43.8	39.2	36.2	36.2	47.9	40.4
Capital expenditures	42.2	42.3	46.8	34.0	36.6	51.1
Professional services costs (consultants,	35.9	35.1	29.8	29.8	40.8	38.3
legal, accounting/auditing, banking)
IT expenditures/budgets	30.5	18.6	27.7	14.9	31.0	23.4
Sales and marketing costs	25.4	22.7	25.5	25.5	25.4	19.1
Advertising expenditures/budgets	25.8	27.8	27.7	29.8	22.5	27.7
T&E	25.0	25.8	21.3	25.5	26.8	25.5
Compensation	23.7	33.0	23.4	36.2	23.9	31.9
Use of outsourcing	19.4	25.8	19.1	23.4	19.7	27.7
Downsizing/rightsizing	19.4	13.4	19.1	8.5	19.7	17.0
Property/casualty insurance	17.2	20.6	19.1	27.7	16.9	14.9
Workers' compensation	13.3	20.6	8.5	23.4	16.9	19.1
R&D	9.4	7.2	6.4	2.1	12.7	10.6
Pension plans	7.0	6.2	4.3	8.5	9.9	4.3
Retiree benefits	3.1	1.0	0.0	0.0	5.6	2.1
Other	6.7	11.3	6.4	10.6	7.0	10.6

(Source: IOMA)