Zero-based control system: it can work in good times and in bad. (The CPA in Industry)by Doost, Roger K.
Interior Elegante is a company which started with a zero-based-control mentality back in 1988. It is a small company and therefore illustrates zero-based control concepts in simple, easy-to-understand terms. But the concepts apply to all organizations, or parts thereof.
Interior Elegante is a privately-owned interior design firm. It started operations in a fancy shopping center whose stores specialized in the home furnishings industry. The anchor store of the shopping center had 35,000 square feet of showroom space representing all kinds of furniture and accessories. Its president lived in another town. Its audit staff reviewed the operation periodically and stayed in fancy hotels when in town. It had a well paid manager and quite a full complement of employees. Its advertizing campaign was expensive and farfetched. Other stores in the center were small or medium-sized. They mostly operated their shops six days a week, nine or 10 hours a day. Most of the firms had bank loans exceeding their equity.
Most stores in the shopping center started advertising and employing personnel as soon as they opened, and filled their showroom space with all kinds of products so their customers would be enticed and encouraged to buy. Interior Elegante had a different approach. The showroom was tastefully decorated but not cluttered. It included items that people needed but in limited quantities. In fact, there were only one each of most of the items in the store including mirrors, paintings, prints, accessories, floral arrangements, and furniture items. The design center of the showroom displayed hundreds of fabric samples and furniture catalogues with little or no waste of space. While other shops became known as furniture stores, lamp stores, and accessory stores, Interior Elegante became known as a design showroom. There were over 20 design- related stores, but there was only one design showroom, Interior Elegante.
Interior Elegante was capitalized at the ratio of 2/3 equity and 1/5 debt, with the interest at a very competitive rate. The owner who had a position elsewhere, worked in the store for free on weekends until the entity was well-established. Only one designer was hired to staff the showroom, with the flexibility to work fewer or more hours as necessary. Other designers were hired strictly on commission and as circumstances justified.
Analyze the Traffic
After an experimental period, Interior Elegante discovered that there was little traffic early in the morning and some days of the week appeared to be better than the others. The designer in charge was assigned to maintain statistics of the traffic during the day by hours. The analysis showed that it was almost pointless to open the design showroom before 11am, and very few came after 5pm during the week. Very little transpired on Mondays and Fridays whereas, middle of the week and Saturdays were fairly active. The analysis and casual interviews with potential customers led to the decision to open the showroom on Tuesday, Wednesday, Thursday, and Saturday, from 11am to 5pm. The store opened its premises at other times for convenience of customers by appointment.
Most of the stores in the shopping center opted for a computerized or a mechanized cash register. Interior Elegante went for a $15 cash box, because there were few cash sales. Most of the firms in the area had elaborate stationery and office supplies-not Interior Elegante. Its staff bought invoice pads from an office supplies company with a pad of blank papers and a stamp pad-all for a cost of $19.
The outside neon signs were usually on at the shopping center from before dark until the following morning, usually from 5:30pm to 7:30am. Interior Elegante studied the times that there was any traffic whatsoever in the shopping center, was evening between 6pm to 8:30pm. Its neon sign stayed on only for those 2 hours.
Most firms in the shopping center kept their track lights on all day and at least half of them on all night--not Interior Elegante. Only one display light remained on for show and security, and the rest of the showroom lights were turned off when the store was closed. And even then, most floor and ceiling lights remained in an off position until a customer walked in. The lights were automatically turned on when a customer entered the premises.
The firm made sure that it brought the best possible products and introduced them to the public at 1.5 times wholesale cost whereas most other stores expected a mark-up of 100% to 200% in order to pay their expenses and have a fair return on their investment. Major customers received complete service with a mark-up of only 15% inclusive of the design fee. Most companies in the area prepared requisitions as well as purchase orders and receiving reports for all items purchased. Interior Elegante did not see the necessity for all these forms. Only purchase orders were used for ordering goods. Suppliers were asked to send two copies of their invoices, one of which was used as a receiving report signed by the clerk receiving the goods.
But Not Interior Elegante
Most stores at the center had one full-time or part-time accountant-- not Interior Elegante! Accounting was kept to a minimum by using a simple accounting software where receipts, disbursements, and accruals were entered on a weekly or monthly basis depending on the volume of transactions. Accounts receivable were kept primarily in open invoice files by customer, supported by a general ledger account which was closely monitored by the owner. Accounts payable processing was kept to a minimum by direct transfer and withdrawals from the bank account wherever possible. Money generated from sales went to pay off loans before any return to investors was allowed. This decision was made when a downturn in the economy was anticipated, and the owners decided to trim the loan amount and any other expense in order to weather the hard times.
Purchasing was through a committee action once a month when complimentary merchandise was ordered to keep the showroom stocked and looking respectable.
Marketing was primarily performed by direct calls on residents in a five-mile radius who had moved into the area within the last year; were within a certain income bracket; and potentially needed some design assistance. This was in contrast to other stores which spent thousands of dollars on general advertising. Too many stores, hard economic times, and fewer housing starts created panic among store owners. One by one the stores, including the giant anchor store, either went out of business or went bankrupt. No new entrepreneurs were found to replace these tenants. But Interior Elegante stood firm as a rock. The only change was to approach the landlord now that every one had deserted the area, and request the landlord to share in the risks and rewards of the business. Ultimately, the rent became primarily a variable cost as well, i.e., a small amount of fixed rent plus a percentage of gross sale.
These, I believe, should be the rules for any firm, large or small-in good times or in bad:
* Start off with a reasonable level of equity;
* Maintain an inventory only if you have to and keep it to the bare minimum;
* Hire part-time or full-time only when such hiring is fully cost justified;
* Account for every penny that you spend; such justification does not have to be elaborate--just think as if it is your own money and you care;
* Find the proper way and means for marketing and advertise only if you have to;
* Keep your accounting to a minimum;
* Make your costs variable to the extent possible; let everyone--- employees, owners, banks, landlords, et. al. share in the risks and rewards of the business to the fullest extent possible.
By Roger K. Doost, Clemson University.
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