Category

Cost Controls

Get your cash under control

Cash Flow Management

By | Accounting, Cost Controls, Finance, Sales | No Comments
Get your cash under control

photo credit: kenteegardin via photopin cc

The number one reason why banks fail? Cash. Reason why the mortgage and housing business went belly-up? Cash. The real difference between the rich and the poor? Cash.

Let me qualify this. There are assets that create wealth over time. Usually when you think of assets you think of houses, investments, etc. However, you still have to manage the cash that these assets produce.

It’s not enough to take home a profit. Cash in the business will give you flexibility to overcome down-turns and take advantage of unexpected opportunities.

I think it’s a good idea to look at a few strategies that will help you keep a bigger cash reserve and not run so close to the margins.

Collect revenue quickly.

This may sound simple, but I’ll bet you’ve had this problem. A big part of collecting starts before the project does.

You have to develop a discipline of billing and create systems to support it. Most A/R problems happen because of miscommunication or false expectations between the client, the contractor, and the billing office. So set your system and your processes to eliminate both.

Determine your payment policies.

If you are providing large-ticket items that may require you to finance or spread out payments for your clients, how you receive payment should be part of the proposal, explained from the beginning, and carefully laid out in all of your agreements. Deposits and expected payments depend on the size of the job or deliverable. The bigger the job, the lower the overall percent you will need to get the first few weeks of work started. Some jobs you may be able to collect only the material costs up-front and spread out payments as you need them. In many instances you should get half the agreed price up-front.

Regular and prompt invoices.

Again, this depends on the size of the job. For smaller products, invoices need to be delivered and collected the day of completion. On larger projects make sure you are billing monthly or every 15 days. Billing this way eliminates lags in your cash and also prevents sticker-shock for the customer. A side benefit is how much more closely you watch your material and supply costs associated with each job.

Price appropriately.

This is not just to help you win large proposals – this includes the services, materials, and supplies that you provide. A 2% change in your net revenue can mean a 30% change in your profits.
Here is a profit and loss that I analyzed for a small contractor and how I suggested he make changes.

 

A 20% increase in your price can create a 146% increase in your net sales

By increasing what he charged for labor and materials by 20% we were able to more than double his gross profits.

He was concerned that this would lose him bids – it didn’t. Instead he found that he was no longer in a bidding war. His customers were less likely to nickel-and-dime him on every little thing because they could see that he did not cut corners.
What profits are you missing out on by not pricing appropriately?

Review your overhead regularly.

I was sitting with a client not long ago and had suggested to him that he needed to raise his hourly rate. Over the months that we worked on his leadership and organization, he continued to resist raising his price. One day he had an epiphany. He wasn’t making enough money to cover his overhead and was not including his overhead costs in his bids. He decided he needed to raise his prices.

You would be surprised how a 2% change in an overhead cost like insurance can drastically impact the bottom line. Take your P&L and your cash flow statement and take it line-by-line and create a strategy on how to trim 1% from each expense.

While this is not an all-inclusive list, these are some of the easiest areas to review and keep in line.

  1. Labor – Do you have a staffing model that ties labor hours to production/revenue? How often is your staff going into over-time? Are you leveraging your own efforts by delegating properly?
  2. COGS – Do you know exactly how much of your raw materials go into your product? For restaurants this means portion control and strict recipes. For a contractor this means knowing how much material will be scrapped and how much of it you can “up-cycle” (or use in creative new ways?).
  3. Taxes – When was the last time you had a CPA check your taxes and not just prepare them? If your CPA or tax preparer is only preparing your reports and returns and not suggesting tax savings, it’s time to find one who does.
  4. Insurance – Whether it’s your liability, worker’s compensation, or employee benefits, having this reviewed and bid out to several providers every year can drastically reduce how much you pay.
  5. Facilities/Equipment – How much you pay in up-keep and repairs might be more than what it would cost to get new equipment.

By regularly reviewing your overhead as you look at your budget, you can increase your profit by tens of thousands of dollars every year.

A word of caution: Cutting expenses is good stewardship of your business and can really help you focus on what is most important for your continued success. The danger here is that a short-term gain in profitability by cutting expenses can hurt your long-term growth potential if you aren’t careful. Do your research to make sure you aren’t cutting yourself off at the knees.

If you are going to have a successful business, control your money. Don’t be ashamed to get paid what you’re worth. collect it quickly, and then be fastidious about how spend it. Cash is the fuel to your business. Don’t starve it to death.

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Keep your bottle-neck full

Drum Buffer Rope

By | Cost Controls, Operations, Systems | No Comments

Keep your bottle-neck fullMy Introduction to Process Management professor should have retired 20 years before I sat in his class. This was a required course and he was not only quirky, but a little disconnected as well.

 

However, the one concept that clicked with me – and something that I have used often – is how to improve operations through a simple concept:

 

“Drum-Buffer-Rope”

 

I have a close friend who is an industrial engineer. I am sure he will be irked by my over-simplification below.

 

Ideally, you should eliminate bottlenecks. However, there are many times when a bottleneck is outside of your control or ability.

 

To make the most out of a bottleneck, you have to keep it as full as possible without creating too much back log.

 

  1. Identify the bottleneck and decide what it’s highest speed is.
  2. Set the rest of the system to only work as fast as the bottleneck rhythm (Drum)
  3. Create a “lead-time” on the work needed (Buffer)
  4. Only send enough work through the system that will pull the work through the bottleneck at a consistent rate. (Rope)

 

Simply put: know your bottlenecks and maximize their operation. It will eliminate wasted time and expense.

business budgeting

On Paper, On Purpose

By | Accountability, Accounting, Cost Controls, Finance | No Comments

business budgetingIn many organizations, one of the most hated seasons is budget season. Your past performance and ability to stay within projections are carefully analyzed. You are also responsible for developing every detail of your budget for the next year and justifying that amount. Often you are not just justifying your budget to your own boss, but also justifying your amounts to his boss or even a panel or board.

 

Why do good organizations focus on budgets so heavily? There are some basic principles at work here that everyone, big or small, needs to take into consideration:

 

  1. Spending decisions are easier to make when you have decided in advance when you have the time to work through the logic of how to run the business without the emotional pressures.
  2. A budgets is really a goal. Knowing what you expect from your business in terms of sales, revenue and expenses helps you to focus on the activities that are going to make your business the most successful.
  3. The difference between a goal and implementation sometimes is accountability. By continually comparing your performance to your budget, you can hold yourself accountable and keep motivated.
  4. Budgets can also be a communication tool to your employees. By laying out the expectations of the business in terms of black and white numbers, your team can better understand what you expect of them.

Often managers don’t use the budget tools they are given wisely and end up losing their department a great deal of money. Business owners make the same mistake.

 

Dave Ramsey says that every dollar should be put down on paper, on purpose every month. Just knowing your budget numbers for each month and not walking blindly will make a large impact in your success.

 

You have to know where you stand before you can know the direction to take.

 

pie

Aren’t Numbers Fun?

By | Accounting, Cost Controls, Finance, Systems | No Comments

Business Numbers matterNumbers, numbers, numbers.

 

Hate them or love them, they run our world. Material wealth is based on a number assigned to the value of your assets and the revenue they produce. How we feel about something is often reduced to a scale between 1 and 10. Even in social media, you base your “acceptance” on the number of likes, shares or re-tweets.

 

So what numbers matter to you?

 

Some numbers you should track even outside your accounting books. Some numbers many businesses need to keep include sales effectiveness (sales calls/store visitors, positive responses, objections, etc.) or quality measures (Re-dos, refunds, material waste, labor hours) but are often not kept.

 

iContact (the email provider I use for this newsletter) provides me with numbers about how many open the email, how many click through, or how many unsubscribe. I use this feedback to know what content you would prefer to read, how to format it and the best time to deliver it.

 

The challenge with keeping numbers is establishing a discipline to:

  1. Record the numbers
  2. Analyze the number to make sense and
  3. Use the analysis to improve your systems.

 

What do you need to know in order to improve your business?

Know your sales least common denominator

Break Down Your Customer Numbers

By | Accountability, Accounting, Cost Controls, Finance, Marketing, Strategic Planning | No Comments

Walgreens over the last few decades has become the most prominant drug store in the United States. When I was growing up, Rite-Aid and Eckerd pharmacies where the top two “corner pharmacy” giants. Jim Collins, in “Good to Great,” details how Walgreens went from a struggling family-run corporation to a national brand.

 

Know your sales least common denominatorOne of the key components that Walgreens focused on for their growth was their per-customer sales. This is a simple number that averages a store’s receipts per customer. Everything including the location, store layout, sales, and product positioning is sculpted towards increasing their sales-per-customer numbers.

 

It is critically important to know your “least common denominator.” For a primary care medical practice you would use charges and collections per visit whereas a surgical practice would use charges and collections per surgery because of what insurance calls global fees that cover all follow-up visits. Every business should know it’s least common denominator to drive business.

 

When you look at your ratios from your your P&L and Cash Flow statements, you take a 30,000 ft view. By looking at your least common denominator you can begin realizing sales and cost-savings that you are missing on a macro level.

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Know your numbers and ratios

Understand Your Business’s Ratios

By | Accounting, Cost Controls, Finance | One Comment

Know your numbers and ratiosEarlier this week, I talked about knowing your numbers. The key to knowing your numbers is having good ratios that tell you how your business performs relative to your sales.

 

I believe in having strong budgets that tell your money where it is going before you spend it. A budget is created based on past experience and how your numbers have performed in the past.

 

However, sales and performance are not always predictable. So having your ratios set up help you to know if your expenses are in control and appropriate for your sales.

 

First, make every expense a percent of your total sales. While reviewing these ratios, determine what the ratio SHOULD be. Next (this is the hardest part) make a plan to get that ratio into the right range.

 

A quick example: in most restaurants, the food cost as a percentage of sales should be about 33%. If your food cost is around 40%, then there are several factors to investigate. There is spoilage (buying too much and not selling it before it goes bad), portion control, your pricing is too low, complimentary meals, theft, etc.

 

You can’t fix it if you don’t know there is a problem. . . .

 

Thou Shalt Know Thy Numbers

Thou Shalt Know Thy Numbers

By | Accounting, Cost Controls, Follow-through, Leadership, Strategic Planning, Systems | One Comment

Thou Shalt Know Thy NumbersDo you watch Shark Tank?

 

Let me give you the basic premise if you don’t. Entrepreneurs and inventors present their ideas to a panel of investors. They are then grilled about their business (or lack thereof) and then investors bid for investment in the business. Sometimes you see an amazing deal made – and sometimes the entrepreneur walks away with nothing.

 

One of the biggest “red flags” is when an entrepreneur doesn’t know his/her numbers. Here they are, in front of big-dollar investors asking for large investments and they don’t have a handle on how their business performs on important financial measures.

 

This is no different than any other business leader –whether you are looking for an investor or not.

 

As I work with my clients, I often see that they manage their accounts based on the number in their bank balance. They cannot tell you what they spend on marketing and what the return is. They don’t have ratios for measuring their COGS, supplies, or other variable expenses.

 

The numbers are not there for the IRS or to know how much money you made. The numbers exist for you to know how to improve your business from the inside and increase your profit.

 

The key is understanding your P&L and your Cash Flow Statement. Make sure you know the difference between the two and how to review both of them.

 

If you already know what they mean, review them. Often.

I want my business to

system failure

By | Cost Controls, Leadership, Operations, Strategic Planning, Systems | No Comments

gears“I don’t want to be a product of my environment. I want my environment to be a product of me. ”

 

—Frank Costello (Jack Nicholson) from the movie The Departed

Many of you know about my two years in Southern Mexico as a missionary. In one area I served I cam across two families that stand out in my mind as stark contrasts.

 

The first I met in a cab ride from the bus station to the apartment in my first hour in this area. He drove the cab and I later found out that he was a science teacher for one of the local prep schools. His wife was due to have their second baby in a couple of months. He worked hard and was just starting out as a husband and father. He did not have to drive cab, but he did want to improve his situation. 

 

The other family I met was completely opposite. His wife worked hard selling in the market to earn enough to buy the necessities of life. I once approached their house to see him laying in a hammock with a “caguama” (a beer of about 32 oz). All he could say was, “No hay trabajo” – there is no work. 

 

One system created opportunity (the first eventually bought a home and became a community leader) the other created stagnation. We can shake our head at the second, but his “system” was to have his wife work while he drank in the shade bemoaning the economy. Guess who made a bigger impact in the world?

 

The economy, taxes, politicians, the system, big business, and the boogie man. The next time you want to blame some out-side source, figure out what is happening with your own systems that did not prepare for the influence of these outside influences.

 

Are you positioned to take advantage of circumstances whether they are good or bad? The difference is the systems you have in place and the quality of execution.

 

 

 

Building Blocks

Building Blocks

By | Cost Controls, Finance, Leadership, Marketing, Operations, Systems | No Comments

“Every block of stone has a statue inside it and it is the task of the sculptor to discover it.”

 

Michelangelo (1475-1564)

A business is nothing more than a system of systems that create value. So examining those systems, there are five basic systems every business should have. I call them the 5 Building Blocks of Business.

  • Marketing
  • Management/Leadership
  • Operations
  • Controls
  • Finance

Of course within those categories, the specific systems that create widgets, tools, knick-knacks, food, services or experiences depends entirely on you as the business owner.

 

In each of my Kicks In the Butt, I try to address each of these individually. Today I am taking a step back and looking at the system as a whole. I am breaking down my own business into these systems with the intent of having them all work together in a seemless fashion.

 

Take a couple of hours over the next few weeks to review your systems. Where is the hand-off from one system to the next? What systems do you have within each of these “Business Building Blocks”

 

I have a very simple diagnostic for reviewing these building blocks. Email me or request it here if you want a copy sent to you.

 

 

Too much material when you're done?

Shrinkage

By | Accounting, Cost Controls, Finance, Time Management | No Comments

Eliminate Waste!

“To me an unnecessary action, or shot, or casualty, was not only waste but sin.”

 

T.E. Lawrence (1888 – 1935)
The real-life “Lawrence of Arabia”

 

Last week I built a wood shed in my back yard. It’s nothing extravagant and only holds about a cord of wood. As I started building I realized that I had not adequately drawn out my plans.

 

The result: Wasted materials and wasted time.

 

It’s fine now. I got it put together and ready for our first cord for the winter. However, I could have saved myself about 30% of the time I spent building it and saved myself 20% on materials. I also have some materials left over that I know can be good for something besides burning it to heat my home.

 

Every day, businesses waste time and materials. Material lost between product and sale in accounting terms is called “shrinkage”. (By the way – this is not the same shrinkage Seinfeld joked about.)

 

After completing a project or a batch – look around at what is left over. Create a plan to reduce the waste.

 

If your business is about service, how can you complete it more quickly?