Category: Accounting

Sometimes training seems expensive, until you take into account the savings in time.  Bear with me on the math (I’m a numbers based person!), but if 4 employees are averaging $35,000 per year, and take an 8 hour class that saves them 30 minutes per day, it takes under 2 months to pay off the class and the time spent in the class.  I have seen equipment payoffs of over 3 years in some cases!  After that, the money goes right to your bottom line.

The lesson to learn is that it pays to assess your skill sets on a regular basis and find out where you can get big payoffs.  Spend time where it is important.

I used to be over zealous about monitoring and tracking EVERYTHING. Now I am just zealous. It took me a while, but I have learned that if you are not using the information, why are you spending time to track it? For a numbers junkie like me, that is a very difficult conclusion to reach. However, after years of tracking everything under the sun, I have found the power of a simple and focused management metric system to be an incredibly effective management tool. It allows you to focus your management time on what you have identified as the most important variables in your business and effectively communicate that information to your people.

Don’t get me wrong; it is vitally important to track information in your business, and critical that you collect the correct building blocks of an information management system. It is much easier to enter a few pieces of data once a day than to try and recreate 6 months worth of data, just because you didn’t think it would be useful. But there needs to be a balance. I have seen accounting setups for small businesses with 150 expense account codes and setups with 4 expense codes. It doesn’t matter if you are drowning in information or starving for information, either scenario is ineffective.

So where do you start with figuring out what data to collect? With the goals for your business.

Lesson Learned: Analyze what you have and what you need, then strike a balance a to make it happen.

What is a per unit cost of production and why should I care?  A per unit cost of production allows you to examine your business over time as the size of the business changes, giving you a much more objective way of measuring performance.  Think of it this way, if you add 5 employees to your payroll and your net income goes up, you won, right?  Maybe, maybe not.

If you take your profit and loss statement and divide each line item by the number of employees for that same time period, you can come up with a per unit (in this case, per employee) cost.  Now when you want to look at two time periods and ask are we doing better or worse, you can reliably answer by each line item.  So if in 2016 first Quarter, you employed 10 people and made 10,000 widgets, you would expect 2016 Second Quarter with 15 people to be able to produce 15,000 widgets.  If you actually produced 12,000 widgets, you better start digging into the numbers more.  If you increased production to more than 15,000 widgets, you may deserve a pat on the back!

Now there are a ton of variables that can affect the per unit cost of production – economy, new equipment, training programs, input cost increases – all will affect the per unit costs.  But at least now you have a tool to help you objectively monitor your business by line item on your P&L.  The fun part is in asking the question why.

Per employee is not the only way to look at your production facility – I have seen managers look at per unit cost by total production, employee, per thousand dollars of investment, and many other ways, searching for the best way of describing their individual business.

Here is a  really cool trick for you to play with:  export a report from QuickBooks into Excel.  Now it is just a matter of adding a column to the spreadsheet, figuring out what per unit you want to look at, and creating a formula to do all the work for you.

Piece of cake… I know!  But that’s another day’s blog post…

Debt is a topic that gets people fired up.  It can make you money.  It should be avoided like the plague.  Classic good vs. evil arguments.  To me, it is just another tool that you can use.  From a business standpoint, it is very important to understand the impacts of debt and why it is called leverage.

Look at the table below.  It represents two scenarios – one where a company is making money, and another where the company is losing money.  I want to focus on ROA – Return on Assets, and ROE – Return on Equity.  If there is no debt, they are both the same.  But with debt, someone else owns a part of your company, and the amount of equity you have invested is less.  When you borrow money and have a good year, your ROE grows substantially more than the ROA.  In the example below, the difference is 20% ROA and 100% ROE.    Borrowing money allows you to make a substantially higher return on your portion of the money invested in the business.

Now for the other side of the coin.  What happens if you have a bad year?  In the second column, you see a company with 1 million in sales lost $50,000.  That’s a shortfall of 5% of total sales, and I have seen folks argue that is not much in the grand scheme of things.  But look at the ROA.  That $50,000 loss translates to a 10% loss in total assets.  And when you look at equity, that amounts to 50% of your equity in the business.

Leverage works both ways.  With debt, if you are making money, your equity grows much faster than without debt.  If you are losing money, your equity disappears much faster too.

The bottom line is, debt is an accelerator.  Make sure you know the direction you are traveling before stepping on the gas.