Stay Curious – The Value of Knowledge

I was going over spreadsheets with a client yesterday, a really cool and complex set of formulas and spreadsheets for overseeing 2 managers, 35 employees, 58 customers in 5 districts. 

There is a series of spreadsheets with contract details regarding service levels, pricing, hours of work, and contact info for each customer.  The COO had developed a master dashboard that linked all the customer spreadsheets into a companywide overview so she can quickly locate details for any customer, manager, or employee that she needs information on.  Sometimes she needed more detail than what was on the dashboard and would have to find and open the file on the network drive.  It only takes 2 minutes to find the right file, but she was doing it 5-10 times per day. 

Until I showed her that holding the CTRL key while pressing the [ (left bracket) would take you directly to the cell being referenced in the formula, even if Excel needs to open another spreadsheet. 

CTRL [ is a trivial pursuit question if I have ever heard of one, but it will save an average of 15 minutes per day for her.  Do the math on 15 minutes per day, for 5 days a week, and 50 weeks per year (yes, there are people who go on vacations!) and that translates to 62.5 hours of savings.  Now you can take 3.5 weeks of vacation this year.  Rather have the cash over vacation?  Multiply 60.5 hours times your loaded hourly rate to see how much money that adds up to.

I don’t care if you call it lifetime learning, continuous learning, or whatever current catch phase is circulating in your world right now, just STAY CURIOUS! 

Need help in Excel?  Check out www.ExcelProTrainer.com for a skills boost.

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Are your profits growing at the same pace as sales?

Sales growth is wonderful, and what most of us like to see happening.  But the real indicator to keep your eye on is profit.  During growth periods, there are people coming and going on your payroll, new product lines, tools and computers bought, bigger offices, more phone lines, the list goes on and on.  But the question remains – are you better off with or without the sales growth?

You don’t need to wait for your taxes to get done to answer this questions.  By merging sales data with your profit and loss, you can look at income and expenses on a standardized per unit basis, allowing you to compare how things were to how things are.  QuickBooks has a nifty export to Excel feature that make life much easier to make the calculations.

Need help with the process?  That’s what we are here for.  In person or by Skype, we give you the numbers to make better decisions.

A business without a budget

I have been having a running conversation with a person who wants to open up a storefront.  Very good ideas, and he was ready to move fast.  So when I said, “Not to be forward, but what do your budgets show for sales and expenses?”  I was met with silence.  Then a quiet “I don’t have a budget yet”.  Sadly, that is a common response.  And while the business idea may be solid, I really prefer to make mistakes on paper.

Asking about a budget did not shake his confidence in the business.  It actually took a bit more than that.  I shared a customized budget template with him and filled in a few numbers based upon conversations with him.  When he started seeing how much sales he would need to cover cost of goods sold, rent, gas, electric, internet, and that pesky thing called owner draw (that’s your pay by the way!) he started thinking about the volume needed to carry a storefront.  It was only then that he slowed down and started to see the benefits of a solid business plan.

After using this template as a framework to look at his business idea, he backed off from signing a 12 month lease.  And that’s a good thing.  He has not lost sight of his dream, but is now focusing on building up his web sales before investing in the overhead of a storefront.  Now his focus is clearly defining his target market, building up his list of potential customers and finding out not only what they want and need, but how much they are willing to pay.  Those numbers are plugged those numbers into his budget, making an even better plan.

I have often heard that a business plan rarely survives first contact with customers, and I agree wholeheartedly!  But that does not mean that you ignore the basics of finance and sales.  Instead, focus on the needs and wants of your customers as you develop your budgets and business plan at the same time.  A business plan is much more robust when you approach the process by focusing on the customer first.  Take the time to work through the numbers first – whether it is a brand new business, or an expansion of an existing business, it pays to make the mistakes on paper first.

Need help developing a financial framework to look at your business?  Want to see the sample Excel budget that helped him change his path?  Send me an email and I will be happy to share it with you!

Too busy for training?

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.

 

Annual Wages  $35,000.00
Working Weeks 50
Hours per Week 40
Labor Overhead – Taxes & Benefits 50%
Dollars per hour (wages/weeks/hrs per week)*labor overhead  $26.25
Course Time (hours) 8
Per Student Labor cost during training (dol per hour * course time)  $210.00
Number of people in class 4
Total Student Labor Cost (per student cost * num students)  $840.00
Instructor Cost in Dollars per hour $125
Instruction cost (Instr. $per hour * course time)  $1,000.00
Total Cost – Student and Instructor (instr. cost + student labor cost)  $1,965.00
Total Cost of training per student (*student & Instr. cost / # students)  $491.25
Hours Saved per week as result of training 2.5
Annual Savings (hrs saved per week * working weeks * labor $ per hour)  $13,125.00
Net Savings (savings – cost)  $11,160.00
Months to recoup investment (total cost / annual savings / 12 months) 1.797

 

Is it worth monitoring?

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.

Do you know what you are measuring?

I worked with a restaurant owner on his food cost management system.  He was meticulous about keeping his food cost under 30% of sales and had worked out the cost for every item on his menu in a spreadsheet and could rapidly look at the impacts of price changes to his bottom line.  A very nice management system to say the least!  However, he would regularly add all of his food vendor bills and divide by total sales for the week and he was coming up with a food cost of closer to 40% of sales.

I was called in to help him figure out the error in his spreadsheet and he was suspecting he had a theft problem.  It didn’t take long to confirm that his calculations were correct, and he was starting to look through security tapes with a grim look on his face.  While he started down that path, I looked at the other half of his double check, the total of the food vendor bills.  Turns out that he was getting all of his paper products like take out containers, napkins, cleaning supplies, from the same vendors.  The consumables accounted for the difference in the food cost percentages.

Sometimes it’s the small things hiding in plain sight that trip you up.

Focus on the Numbers: Per Unit Cost of Production

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…

Why do we have managers who can’t manage finance?

The failure rate of startups has always dismayed me. In my consulting, I see two main reasons for business failure. First, people don’t have a firm grasp of their financials. They just don’t know their numbers. Second, people underestimate the toll on their physical and mental health. Depression, divorce, heart attacks and strokes from stress are all too common and dismantle many companies that have everything else going for them.

Let’s look at the first reason for failure – Managers who can’t manage finances. The bulk of our entrepreneur class consists of people who start a business out of passion – I love to bake, to farm, to fix computers – but they don’t have any business background. How do they get their start? They are disgruntled employees who are so fed up with the way their boss does things that they quit and start their own business, with the barest of plans.

If you think about it, the entire restaurant industry has managers who do nothing but sooth irate customers and make sure people show up for work. Manufacturing is no different. From line managers to shift managers, financials are hidden from people. The focus is make your production numbers, or we will find someone who can. Anyone who has had a sales job knows it is all about hitting the sales quota. Just sell more, more, more. Rarely does anyone get to see the whole financial picture.

Is it any wonder todays entrepreneurs are missing critical skill sets? Budgeting. Reading financials. Financial controls. Cash flow. Profit and loss. Balance Sheet. Net Worth. Top that off with the misconception that having a CPA do their taxes once a year is more than enough and you have a small business at a disadvantage.

Here is a news flash. If you can’t put your hands on rock solid financial numbers to back up a decision and plan for the future, you are not managing. You are working hard and hoping for the best. Maybe it’s time to start working smarter, not harder. Focus on your financials.

Focus, but on the right thing.

Last week I met with a sales professional who was pretty darn good. At sales. She told me “last year I made 88 thousand. But in November, things got slow, and now in February, I have nothing left. I have been eating off of credit cards, and I don’t know where all that money went. I have over $12,000 in credit card debt.”

It’s not an uncommon scenario among people who make a living off of sales commissions. Real estate agents, car sales people, insurance agents – all of them are able to “sell” their way out of a financial hole. So how did she get in this financial hole? For starters, she was focused on one goal. Sell as much as possible. Generate lots of income. Period. Strong sales compensates for weak financial management skills, and when the sales dry up for whatever reason, the crash is hard and fast.

The solution?

First step: Change your focus. From sales, to net worth. Choosing the right metric makes all the difference in the world. Set realistic financial, sales, and personal goals.

Second step: Find out where you spent all the money. Download your check book register to QuickBooks, Excel, or any other program that lets you sift through the data easily and find out where you spent your money.

Third step: Create a budget. Replenish your cash reserves, plan not only your income and expense, but also your assets and liabilities. Make the budget robust enough to handle the variability in your income stream while adding to your net worth.

Fourth step: Develop processes that support your goals. Formalize your sales process to fill your sales funnel from prospects to sales. By keeping your sales funnel filled at the top and following your process, sales droughts are leveled out and financial stresses are reduced. Follow the sales processes religiously! Develop financial processes that alert you well before any financial issue becomes a business threatening disaster. Build in automation to make sales and finance functions efficient.

Fifth step: Breath. Control your thoughts and don’t panic. Decisions made in the heat of the moment are rarely good decisions. Gather data, develop a solid plan, and implement.

That’s the path out.

 

The Hidden Cost of Debt

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.

 

  Making Money Losing Money
Sales  $      1,000,000  $  1,000,000
COGS  $         400,000  $     600,000
Gross Sales  $         600,000  $     400,000
     
Total Expenses  $         500,000  $     450,000
Net Income  $         100,000  $      (50,000)
     
Assets  $         500,000  $     500,000
Liabilities  $         400,000  $     400,000
Equity  $         100,000  $     100,000
     
ROA 20% -10%
ROE 100% -50%
     
Equity AFTER Net Income or loss  $         200,000  $       50,000