Our Man in the Field: Security for Profit?

Nov. 23, 2004
Translating your security budget into a form the accounting staff can understand and use

For the past 20 years or so, I have been promoting security as being a profitable venture, if done properly. For the past 20 years or so, I have watched as security directors all over the world promote their annual budget or make requests for security upgrades. And for the past 20 years, I have watched as budget after budget has been revoked, shot down, or put off by the corporate bean counters. So I have spent the last few years consulting with various security directors and dealers on how to design a proper budget request. After all, if done properly, security is one of the most profitable functions that a corporation can do. That's right -- security can generate a countable, useable, cash profit. The key is to learn how to present and demonstrate.

Start with Problems
Let's start with the problems, and once these are deciphered, it will be easier to see why security budgets are difficult to get passed through the money guys. First, most security directors and security sales people do not come from a background that includes Accounting 101. Second, most security directors and security sales folks are not or have not been independent business people that have had to bare themselves in front of a non-personal banking group. This is a curable problem if you are willing to take a look at things from the other side.

Thirty years ago, I went in for my first corporate loan. I showed up in blue jeans with a crumpled piece of paper with some notes about the business that I wanted to start. I also had a note from the owner of the bank saying that he would back me up. I sat down with the head of the commercial loan department and proceeded to get the lesson of a lifetime. He asked what I needed and I said $20,000. He smiled and asked to see my business plan. I showed my crumpled paper. He smiled again and asked me why I was wasting his time. Undaunted, I showed him the note from the owner. He smiled again and shook his head. He then proceeded to explain to me that his job was to protect the owner of the bank from making foolish investments. He then suggested that I come back when I was serious about the venture. I stammered and asked him what I should do to show that I was serious. He said, "Pretend that you are loaning me $20,000 and then ask every question that you can think of to protect your investment. Organize the questions and answers into a report and then study the results. If you think that you are confident that I have a plan where I can and will pay you back, you did your job."

I left and went to work. I took a week's vacation from my job and spent the next 20 hours a day working on questions. I ended up with a 45-page report with graphs, studies, payment schedules, proposed incomes, markets, etc. I put on a suit and went back to the same man with five copies of my business plan. We reviewed the work and he was impressed. When he asked me what I intended to do with the extra copies, I told him that I was going to hand deliver them to each of the loan council members. I wanted to give them time to review my business plan before the next day's meeting. The net result was that I got my loan. I started LRC Electronics Company and went on to complete 20 very successful years of repairing CCTV equipment. I also was never turned down for a loan or budget again. Lessons were learned.

OK, so the stage is set. Let's review a few of the other problems with most security budget requests. They tend to be:

1. Financially unrealistic: Often, too much is asked for all at once. Or the request was too fancy or technical for the bean counters to understand. Often these unrealistic proposals didn't provide a progression over a couple of years.
2. Seen as unnecessary: There is a lack of perception of the need for security or updates by the corporate leaders. This means that you didn't present your case well or you didn't prove your needs sufficiently or you didn't present your case to enough key people for support.
3. Lack of funding: There is no funding available due to the timing of your presentation. Maybe you waited until the last moment. Perhaps you presented it too late in the corporate year to be considered for the next budget planning session. Maybe the bean counters don't understand why you are asking for the money and only see the purchase as "new toys." Maybe -- and this is the big one -- you didn't "speak bean"!

Speaking Bean
Speaking bean is a matter of simple understanding. Accounting people have their own language and their own methods of calculating, and they tend to look at outsiders as uneducated, financially inept turkeys. Accounting folks view spenders as folks that are trying to affect the profits with unorthodox and unnecessary capital spending. The bottom line is that unless it is presented properly, security spending is viewed as an expense.

So, you need to learn some things, such as the language, and their ideas.

First, you need to know the company's fiscal year. This is the time that the company books start a new year, and this moment is not necessarily attached to New Year's Day and fizzing bottles of champagne. It is the time, however, that all new budgets are put into play. Your big money requests need to arrive an average of 90 to 120 days prior to the end of the fiscal year in order for you to have time to present the case for your budget.

What is the debt to equity ratio? This is a number that is calculated against the cost of an object and its potential earnings. If you want to spend $20 for a $10 diamond, your debt to equity would be 2:1. That means you have two parts debt to one part asset ? the diamond isn't a good investment. If, however, the diamond increases in value, the debt to equity ratio would also change on the long term and could prove to be a good investment. Show how the debt will be offset by the value of an object or project and then determine if the investment is worthwhile.

Concern yourself with gross profit and net profit next. Gross profit is the money that is left over after the parts or fixed costs are removed. Net profit is the money that is left after all other expenses are removed. If you have a tool that you are selling for $20 and you have $2 worth of parts invested in making the tool, your gross profit is $18. After you take out the cost of production (salaries, utilities, rent, etc.) you have your net profit. The net goes to the bank!

What is the break-even point of your venture? Ask at what point you plan to have the debt paid off and start to work for profit. There is technically no net profit until the debt is paid off.

So at this point you are all looking cross-eyed and wondering what rock I walked out from under. Hang in there. Let's put together a plan.

First, lay out your system or system upgrade. Come to an upfront cost of installation. Now add your maintenance contract times five. Add these together and you have your five year cost. Notice that it is a bigger number than what you originally asked the bean counters for. Now you are being realistic and intelligent about the true cost of your security plan. The bean counters score you a point for being upfront.

Next, if you have guards and you are planning to add or remove any because of your upgrades, add in or subtract the cost of that guard for five years. Do this and the bean counters score you two more points.

Now, look at your history of losses. How much are they over the past three years? How much will your upgrade or new system cut these back? Be realistic and honest. Take this number times five and subtract it from your five-year costs. The bean counters score you three points. Keep this attitude going throughout your spreadsheet and you have created a profit/loss (P/L) statement.

Next write out the processes and plans of your security upgrade or system in plain language and attach these to your five-year P/L statement. Pretend that it is your money and you will want to account for everything. Make a few copies (minus the P/L statement) and distribute your plan to key people in the corporate office. Take the numbers package to the accounting department. If you can, deliver everything personally with a handshake and smile. A quick explanation should follow, and then you're done. You get a couple extra points from the bean counters.

OK, there is a bit more to the whole project, and I make it easy to the point of absurdity, but you can show cash profit and you can get your budgets approved.

Learn to speak bean and operate within their system. Knowing the points of the game can make you a player. If you need help, call me. With today's cell phone rates, the call will be cheap and the advice is usually free.

About the Author: Richard R. "Charlie" Pierce has been an active member of the security industry since 1974, and is currently working on a software-based tool for calculating security investments. He is the founder and past president of LRC Electronics Company, a full service warranty/non-warranty repair center for CCTV equipment. In 1985, Charlie founded LeapFrog Training & Consulting (Formally LTC Training Center), a full service training center specializing in live seminars, video-format certification training programs, plain language technical manuals and educational support on CCTV. He is an active member of: ASIS, ALAS, CANASA, NBFAA, NAAA and SIA. He is the recipient of numerous security industry awards, and is a regular contributor to Security Technology & Design magazine, SecurityInfoWatch.com and this website's Security Frontline e-newsletter. Contact him via LeapFrog Training & Consulting at www.ltctraingcntr.com.