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Cogent Analytics

Delivering Powerful Business Solutions

Cogent Analytics--Stuart Groo--Project Director

Generating New Prospects

Often times our clients need to generate additional revenue. They may have a dozen good reliable customers but in order to increase their profits or cover their overhead or replace customers who stop using your services; you need new customers. You need to generate new leads and educate those prospects as to your services and abilities. We need to determine their needs and show them how we can satisfy those needs. Before you can sell however, you need to generate the leads that will allow you to “get your foot in the door.”

The first step is having a library card or access to a library card. This can be done in person usually at any branch. You may need a proof of residency for the county or city that runs the Library. Oftentimes, you can also obtain the card by going on-line to the library web site.

Next, make sure that your Company Website is current and up-to date. Once you make contact with someone they are sure to look-up your Company to make sure you are legitimate and to size up your capabilities. A website with typographical errors or incomplete sentences or grammar mistakes will not reflect well on your Company or your professionalism. Ensure that the website gives an accurate picture of your goods or services and any unique abilities that your Company possesses. Ideally, a good website should be a major factor in creating “demand generation.” In other words, creating an awareness of your Company that people in need of your services or your products might see your Company as a means to fulfill these needs and actually reach out to contact you through the website. However, if we are not getting calls or inquiries, we need to seek out our own new leads. This is where the next step can be very helpful.

The next step is to have an understanding of the North American Industrial Classification System or NAICS. This system classifies and assigns a number to every industry in North America. This system can be accessed on-line by searching “NAICS.” This will give you various industries with the appropriate numbers to enable you to track these industries. For example, if you provide services such as maintenance, servicing and repairing of industrial equipment (conveyor belts) you may want to research those industries where a conveyor belt would be used. They most likely run 24/7 and need regular maintenance or repair frequently. Some examples would be tire plants, paper mills, quarries, and food processors. By going to the NAICS website you can enter the keyword for your industry (paper mills) and the number 32213 comes as a general class number but this can be “drilled down” to Corrugated or Folded. The corresponding numbers are 322211 and 322212. This process can be repeated for all of the industries that you think might need your services.

Another method for selecting industries is to research your biggest customers and determine what are their NAICS Codes. (They may have more than one.) Be careful because the codes are often entered on the tax return by their accountant and can be erroneous or are a code for a segment of the company you are not familiar with. Double check that the number is linked to the service you want to track. Once you have determined the correct number you can research other companies that you could approach to sell the same services that you currently sell to your existing customers.

The next step is to make a list of all the NAICS codes for the industries you are interested in approaching. Once we have our list, we can now access the local Library databases.

Now you need to get online with your local library website. As part of their reference department, a most all libraries subscribe to a database service which have numerous research possibilities. Some of the popular systems used are “Reference USA”, “Hoover’s”, and “Mergent.” Any one of these systems would be suitable. Once you find the “databases” on the library website you select “databases.” This will give you many choices for research. However, we are most interested in those that have “business statistics.” In one database the choice is Mergent Intellect. Once you access this database, you should select the setting for “Advanced Search.” Then select “industry” and select “NAICS code” to use the codes selected. Enter the NAICS code that you want to research and then hit “add to criteria.” Now if you want to check for industries in your region, state, county or city, you can now do that by clicking on “location” and then scrolling down to select the geographical criteria you want. You may want a list of companies in your state or neighboring state; or you can select your county or neighboring county depending on the size of the industry you are tracking. You then add this to “criteria.”

[There may be some small variations between databases and how they are set-up to accept data, but a call to the library reference desk will usually get a very helpful librarian to walk you through any unfamiliar steps.]
This process will produce the names of the companies that are in the selected industry in the geographical location that you want. Highlight the name of the Company on the list produced and it will drill down to give you other essential information such as, number of employees, sales volume, phone numbers, pay history, family tree and date of founding. All of which will help you determine whether you want to pursue this company as a prospect.

As you research each company you can make a list of those who you may want to follow-up on and those who do not look like good prospects; not enough sales, slow pay, too far away etc. Get the phone number and address for those you are interested in.
At this point, someone should be designated to make a call to obtain the name of the decision maker such as head of maintenance or facilities or head of engineering. This will give us the ability to customize a brochure or pamphlet with his name and title and mail it directly to his attention. Ideally the brochure will fit into an envelope that we can mail first class and it will not get put into the “junk mail” category. This may allow you to bypass the “gatekeeper”.

Some people may prefer to call right away and try and reach the decision maker but you may be dealing with the gatekeeper who will not forward the call. For that reason, a brochure or pamphlet sent in advance might open the door or get some name recognition when you do call. The pamphlet or brochure could be the reason for your calling and it gives you an opportunity to explain the types of services you can provide to their company.

All of which can be done without leaving your office and wasting time in non-productive cold calls.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Rewards: Unnecessary Pay, or Positive Reinforcement?

Most every small business owner desires dedicated, hardworking and loyal employees. The problem is how to do you cultivate and reinforce those values? We pay people what we believe to be a fair and competitive wage for their work, yet that may not be the only means required to foster the winning attitudes desired. How many times have you heard “but that is what I already pay them to do.” Maybe. Do you pay them enough not to make mistakes? Maybe. Do you pay them enough to give extraordinary customer service? Maybe. Do you pay them enough to go the extra mile? Maybe. Do you pay them enough to expect quality work all the time? Maybe. The answer might be that we pay the going wage and expect all of the above but don’t always get it.

Naturally, owners have high expectations for their money spent; not all of which get explained conveyed or taught to all of the employees. So, are you getting your money’s worth? More importantly, are you reaching your company goals and expectations?

A vast number of small businesses do not have goals or measurements in place to rate employee performance. When it comes to the majority of their employees; “We really can’t tell how to distinguish among most.” They can name a few of the best employees but really can’t rank the others. They do not measure performance. For that reason, companies revert to the bonus system as their method of reward. Some may get a little more money, but others may not even get recognized. As we have maintained all along “You cannot manage what you do not measure.” However, once you put measurements in place, it becomes incumbent on ownership to put rewards in place to continue to encourage the best practices.

What are we looking to accomplish?

  • Increase productivity.
  • Motivate.
  • Reward high achievers.
  • Develop “team players.”
  • Retain key personnel.
  • Say “thanks.”
  • Increase profits.

These may be our stated desires, but our ultimate objective is to set goals and keep score by measuring how close we come to achieving the goals. Some of these may be obtained with an incentive and others may require different means of stimulation.

A brief look at the most common means of additional motivation might be advantageous.

BONUSES

  • Probably the most common form of motivation is the bonus, typically based on the overall performance of the company. Unfortunately, the amount given often depends on longevity and not individual performance. It is often arbitrarily determined. There are usually no real criteria applied to determine the amount awarded; nor do the employees know what to do to better qualify for the award. Often the same amount is allocated for the same class of employee regardless of individual performance. Structuring a bonus this way can often accomplish the opposite of the desired outcome because it creates jealousy and resentment among the employees who worked the hardest when they get the same reward as some who do not perform as well.
  • The bonus may be one means of saying “thanks” and buy some short-term loyalty, but that seems to be the only two on the list of desired goals.
  • Another common problem with bonuses is they become an entitlement. That is, the employees come to expect they will get a bonus at Christmas regardless of how they perform, which has the adverse effect of not increasing productivity or motivating better performance.
  • It lowers profits (pay-out) without getting much in return.

INCENTIVES

The usual requirement for an incentive is that it comes from an increase in profits brought on by the change in behavior that the motivation has created. The best example of this is in construction. We have bid a job with 100 hours of labor, but we tell the foreman that if the crew can complete the work in less time than the bid, we would split the savings with him and his crew. For example, if they finish the work in 90 hours, we have saved 10 hours. If our combined crew rate is 80 dollars per hour, we have gained $800 in savings on this job. Therefore, splitting this brings the crew $400 and the company an additional $400 in profit. Productivity now increases as well, as an extra 10 hours may be applied to new work.

It accomplishes most things on our list of goals:

  • Motivates
  • Increases Productivity
  • Increases Profitability
  • Rewards High Achievers
  • Promotes Teamwork for that Crew
  • Says Thanks
  • Helps Retain People (As long as they earn the Incentives)
  • Increases Profitability (Company keeps a share itself)

So, this incentive accomplishes all of our goals to some degree. The drawback to this incentive is that the hours needed for the job are set by someone else (an estimator), and they may not be accurate. Secondly, the degree of reward may vary significantly from job to job.

Not every project taken on by the company is conducive to creating additional measurable profits. For example, a data entry person has little they can do to increase profits. The company receptionist will also be hard-pressed to improve earnings measurably. However, if they are perpetually out of the incentive loop, we will be defeating the motivation goal and that goal of retaining the best employees.

INCENTIVIZED BONUS

This would be a hybrid product. Measurable goals need to be set for each position. They may be as simple as a customer call, email or letter to praise the employee for the job they did. We say that we will pay $25 for every customer citing this good behavior. We cannot say that it immediately raised our profits, but we know that 56% of people share their positive experiences. A dissatisfied customer will tell 9-15 people, and 13% of the dissatisfied will tell 20 people about the problem.[1] So, why do we want to reward excellent customer service? It likely leads to more positive word-of-mouth marketing and referrals for the business. It is what we want in an employee, but we do not always get these results. It is an out-of-pocket expense, but since it is tied to performance or goals, we hope it will result in positively affecting behavior which will lead to referrals and higher profits.

Other forms of measurement can be rewarding crews for documenting their critical work with photos that we can keep on file, or for sending in the daily reports with the time sheets, all of which slow down the back-office work if not done on time. Obviously, there may be duties that we already expect for their pay, but if it is critical to company performance, we may need to measure and reward on top of the base pay.

Now, this system can also have deductions for mistakes found in work; such as failing to pass an inspection or for the poor quality of a particular installation. So it can work both ways with positive cash for good behavior and deductions for mistakes made. Keep in mind that deductions may not come out of the employees pay but can be deducted from the incentive dollars they have earned.

SPONTANEOUS REWARD

This would be a situation where we have not set any specific employee achievement goals, but we recognize behavior or actions that are above the norm. It may be someone just taking extra time to explain a situation to a customer. It might be someone going out of their way to make a delivery, or it might just be an outstanding attitude on the phone.

Whenever this “going the extra mile” is observed management should be prepared with gift cards, cash, discount coupons, ballgame tickets or extra time-off to bestow on the valuable employee. These rewards are best if disbursed swiftly and accompanied by an announcement of the reason for the reward.

This approach can be one of the most influential tools to modify overall employee behavior by getting others to go out of their way in hopes of being recognized themselves. The reward must be meaningful and spontaneous for performing above the average expectations.

SUMMARY

Recognizing that we pay people a base wage for their work, and once we set goals or begin to measure performance, we will need to reward those who out-perform the majority. The basic bonus is probably the least desirable. A combination of incentives and incentive/bonus, coupled with the spontaneous reward will probably get the most desired outcomes while boosting morale and getting the measurements and results the company strives to achieve.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Effective Management

Business colleges may take a semester or two to cover this topic. There are in-depth charts and analyses to sharpen one’s skills. However, for those of us that no longer have the time to devote to a semester or more of study, it might be good to establish a few ground rules and precepts to follow. Obviously, we need to confine this discussion to the fundamentals. However, here we are focusing on the management of small businesses and not that of large corporations.

First, we need to define it:
“Organization and coordination of the activities of business in order to achieve defined goals.”

The activity of management may incorporate the controlling, monitoring, planning and organizing of the steps necessary to achieve the stated goals. Various techniques and management styles may be used, but the objective is still to accomplish predetermined goals. Having defined goals is almost a prerequisite to having competent management and a successful company. Often, small companies have no set goals. They struggle in day-to-day operations and without goals delineated, there are no means of measuring success. They are willing to work a whole year and settle for what is left over for profits. Predictably, this lack of planning will often result in no profits and should be no surprise to management. Unfortunately, it does usually come as a big surprise because no one is, by definition, managing.

LEADERSHIP VS. MANAGEMENT “

In the small businesses that we are most familiar with, the difference between the two may be blurred. In larger companies leadership is thought to encompass the big picture; budgets, goals for the next three to five years, diversification, capital spending. It incorporates the vision and the plans necessary to achieve the goals. However, the same individual might be expected to do both in our scenario. Having consulted with management and determined the short and long-range goals, it may now become necessary to lead the employees to achieve them. Establishing a course of action or actions may require guiding and persuading the company personnel to follow specific steps that will result in the achievement of the predetermined goals. Thus, managing employees requires the “leadership” skills to reach the company goals.

MANAGEMENT “
Without a doubt, the objective is to reach the ultimate goals (revenue and profit) set for the company. However, there may be various intermediate milestones that need to be tackled first to accomplish the final objective. To achieve these, the “managers” of the company must lead the employees into making the correct decisions and actions that will give us the desired results. So, the question is really how is “management” accomplished? Techniques may differ, and some may be more effective than others, but a few overall principles should apply:

  • Be Consistent- Treat everyone equally.
  • Be Persuasive- Demonstrate the reason and thought behind a particular task.
  • Short-term Goals- Focus on the intermediate steps that when accomplished should lead to the overall attainment of the bigger goals.
  • Job Description-Well defined with tasks, responsibilities, and objectives.
  • Define acceptable results.
  • Find methods to improve employee’s work- Use of Key Performance Indicators to measure the effectiveness of employee work.
  • Universal involvement- Key Performance Measurements for all.
  • Staff Meetings-Coordination between all departments and employees- Use regular staff meetings to highlight progress and report KPI’S.
  • Teach and Inform-Teach individually and inform all as to progress and best practices.
  • Avoid Criticism- Mistakes will happen but correct in private
  • Prescribe remedies to mistakes and inform all.
  • Minimize risks.
  • Uniform teaching is done by the best at their job.
  • Promotion- Use as a reward for high achievers.

SUMMARY
We have previously defined “Leadership” as setting the long-term goals for the company. Once we set goals, we find that management techniques require measurement and the use of “Leadership” to bring all employees to achieve them. Set the goals, and lead!

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

OWNERSHIP

Why does one go into business? Consider these four classifications of Owners; the inventor, the salesman, the entrepreneur and next generation. Where does your client fall? There is almost no one who is a trained businessman from the beginning. Some may go to business school and desire to run a Fortune 500 Company, but most are everyday people that see opportunity and a niche or see a product that they think makes sense that they would be able to market. However, few have been taught the business of managing a business.

There are over 6 million small (under 500 employees) businesses in the U.S. How do they become successful and how do they manage success? Some will be self-taught (to a point), others will hire more skilled employees, and others will seek outside assistance. Which of these paths they will take may depend on which type of owner they are.

INVENTOR – He has developed a product or technique, and now he is not very concerned about how it gets marketed or how to price it or finally get it to the user? He is even less interested in billing and collecting his money. He just created the ultimate widget, and that is all his only care. He may want to invent enhancements, another widget or even retire. However, not much thought goes into putting a company in place to do what is necessary to get this product to the ultimate consumer. He might even sell the invention so as not to deal with the business aspect of it.

SALESMAN – He can sell almost anything; he is not really interested in managing people. The back office tasks of billing and collecting the money are all left to someone else. The challenge is in the sale of the product, where he might undercut its price just to get the sale. He likes his independent schedule and does not want to be held accountable for his time or efforts. He almost always needs someone to run the business or a strong “right-hand man/woman.” He will be looking for the next sale and not be concerned with the day to day operations. Rarely will he be in the office. The business is entirely dependent upon him for bringing in new business. Without the owner/salesman, the company would cease to exist because he is the only sales stream.

ENTREPRENEUR – This person is always looking for the new challenge; he does not want to be involved in the business he founded. He would prefer to establish a new venture, get it started and then move on again. He is probably not interested in day-to-day operations once the company is running. He may create messes and then move on to the next newer business, leaving others to clean up after him.

NEXT GENERATION – This group is the family or friends that inherit or buy an ongoing business. The business has been “successful,” and nobody wants to change that. Even though change is natural and inevitable; yet they keep doing things the same way it has always been done. Pricing from the 1990’s or sales and marketing methods that have not changed with technology. Alternatively, “let’s add 35% for overhead and profit because that is what we have always done.” Not knowing or taking the time to calculate what the exact number needs to be.

The object here is to point out a pattern in each of these types of ownership. The fact that not one owner wants to manage the business that he/she created, nor is the next generation going to change their methods of doing business. Each has a different goal in mind for his/her company. Keep in mind that 50% of all new businesses fail within five years. Is this surprising when you look at the type of “owners” who go into business?

A large number of owners may rely on advice from their accountant or lawyer to help run their business.

An accountant’s goal is to reduce your taxes; very few have run or are trained to manage a business. How the Chart of Accounts is organized can tell you how much credence is given to the actual running of the company. There are very few Charts of Account’s that are set up for managerial accounting. There is little thought to distinguish between fixed expenses and variable expenses. The accounts are not designed to provide adequate numbers to help manage a business. One line for all of the revenue streams, one line for the cost of goods is not sufficient for running a business. Most discussions are centered on tax avoidance and not how to efficiently monitor the numbers to improve the business. If the COA is not set-up correctly and you are using the accountant to provide the financials, then you are inevitably a month or two behind in getting this information. This system does not assist in the managing of the company because you are always looking backward; not forward.

The lawyer for the company is adequate for incorporation, asset protection, and other legal advice but is rarely trained actually to manage a business.

Most accountants and lawyers have enough trouble running their own business let alone that of their clients.

SUMMARY Yes, there are a small number of owners who do an excellent job of surrounding themselves with competent people who perform what they will not or cannot do. The vast majority, however, do not understand the business of running a business and those that do have not employed competent people to move to the next level.

The previous discussion is meant to point out just how many small businesses might benefit from a relationship with a Small Business Consultant. While there are a plethora of small business owners out there, they are not interested in actually “running the business” they have created. Most do not have the training, and many do not have an interest in running the business. Their forte lies elsewhere in the business. Consultants are perfectly equipped to determine the type of owner for each project and help them build a team to manage the company for the future.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Fundamental Sales Planning

PRELIMINARY CONSIDERATIONS

One of the first considerations is the determination of the sales revenue required by the company to meet its payroll, expenses and desired profit. Are we expecting sales from other revenue streams? Do we have inside sales and outside sales groups? Do we have revenue from areas with no assigned salespeople?

Regardless, a company-wide budget should be drawn up in order to set the company goals. As part of this budget, a separate sales and marketing budget should be determined so that everyone knows the guidelines for spending in these areas as well.

With a budget in place, we must make an accurate determination of the Overhead Recovery Rate since this is the most critical factor in pricing our services. It is hard to sell profitably not knowing your expenses.

Next comes deciding if we will apply the Overhead Recovery Rate to materials and labor or only to labor. In most cases, we choose to charge the Overhead against the labor cost.

The profit desired on every service or bid will most certainly require a qualified estimator or owner of the Company to decide what is the most suitable formula for that particular job once the Cost of Goods and Overhead has been applied.

HIT RATIO

Once the goals have been determined (budget) we then need to discern the steps necessary to reach projected revenue. In other words, how many sales calls do we need to make before someone gives us a Request For a Quote. Then, how many total RFQ’s submitted before we actually obtain an order or a sale.

If we have good records of projects that had been awarded and a history of the number of estimates that were submitted we can calculate a ballpark “hit ratio.” For example, our revenue last year was $1,000,000 if over the course of the year we provided 200 bids and got 20 jobs we have a 10% hit ratio. Our average job was $50,000. If required revenue is $1,500,000, we will need to add 10 more jobs at our customary average and 100 bids to get those jobs. If we have records for more than one year, we can take a historical average of jobs awarded versus the number of bids. We can gather most of the this directly from QuickBooks if that is the system you are using.

If the estimates and the number of jobs are not readily available, then we will need to do some digging. In construction, we need to see how many projects we billed for over the course of the year and how many letters, emails, phone calls were made with quotations where we never got the job. So, if our new projected budget requires 30 total jobs (10 additional), we will need to bid 300 total jobs assuming that we average the same $50,000 per job. If not, we will need to adjust our number of bids up or down based on the value of the awarded jobs. Another factor may be whether we “negotiated” any of these jobs. In other words, did we lower our bid to get the job and take it away from a competitor?

If we are strictly doing direct selling, we need the records of the salesman’s calls and how many were needed before we actually got an order.

The utilizing of these ratios will help set expectations for the salespeople in terms calls needed; daily, weekly and monthly in order to achieve our required revenue.

STRATEGIES

  1. Target Market– What business or project should we go after? Using our previous example, we need to categorize the number of jobs over the $50,000 average and how many were under par, Now, we need to break them down according to profitability. Which size job brought us the most profits? Was there any pattern or was it the job foreman? This may help us to decide which size job we want to pursue. If it is manufacturing we are trying to sell to, we may want to track the types of businesses who buy our products or their size which may help in determining our target market.
  2. NAICS CLASSIFICATION– Once we have settled on a target, we need to have a method for discovering new leads. In construction, it might be word of mouth or invitation. However, also in contracting, or in the seeking of new customers in any industry, you can use the North American Industrial Classification to help find new leads. Every sector is assigned a code number, and depending on the sub-classifications the number may be as much as a 6 digit code classification. These numbers are readily available on the internet under NAICS.
  3. LIBRARY REFERENCE DATABASES– Most libraries use reference databases that can be accessed online using your local library card. Three well-known systems are Hoover’s, Reference USA and Mergent. Most libraries have one or the other. The databases will allow you to locate businesses in geographical areas from cities, counties, and states using the NAIC Code numbers. Generally, it will tell you the ownership, revenue, location, number of employees, etc. This will enable us to identify those businesses that fit our previously determined target market.
  4. MAILINGS/PHONE CALL– Do we have a well thought out means of approaching prospects? Once we have selected companies from the databases, we need to have a plan for “getting our foot in the door.” Some prefer to just show up at the prospect’s door, with the hope to get an appointment. However, there is often a gatekeeper whose job it is to screen all callers and visitors and whom will likely turn you away. Another approach might be to have a company brochure or pamphlet to mail to the appropriate person. One that outlines the services that the company provides and how the target company might use those services. This could be accompanied by a personal letter which mentions companies you have done work for as well as any mutual acquaintances (prior approval of the person). Mail both in a first class envelope so as not to appear to be junk mail. This mailing should then be followed up with a phone call several days later to try and get an appointment to meet with the individual.
  5. THE APPOINTMENT– Once we have the appointment, we need an approach that will accomplish several important things. One methodology of selling your services to the prospect is a question-based selling approach. In some cases, it might be called S.P.I.N. selling ( Situation, Problem, Implication, and Need-payoff), which is often used for projects that may take several months or even years to obtain a sale. Conversely, it might just be questions you ask to foster doubt in the prospect’s mind that he currently is using the best products or services. The object is to put doubt in the prospect’s mind as to why he isn’t using your product or service already. Some tips to get started:
        • Know the prospect’s business inside and out. (see #3 Databases)
        • Don’t waste the prospects time.
        • Explain your company in 1 minute or less.
        • Do ask engaging questions.
        • Do determine nature of the prospect’s customers.
        • Are they experiencing any problems with their current suppliers?
        • What improvements would you like to see from your suppliers?
        • Do your current suppliers provide this service?
        • Do they fill your orders 100%?

SUMMARY

Developing a basic sales plan starts with the formulation of the company budget which incorporates the sales and marketing budget as well. Determine where you need to be. Determine your “hit ratio.” Then research your leads and begin your quest for an appointment.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Inventory: Potential Profit Drain

Many businesses have a profit drain in the guise of inventory sitting on their walls, whether it be for resale, for assembly or for use in performing company services. Dependent on the size of your enterprise, how this is handled can positively or adversely affect company profits. Too much of the wrong inventory and we are tying up much-needed cash for business operations; too little inventory and we may miss much-needed sales. This dilemma is always a hard decision for the business owner, should we invest to grow sales or operate in a lean manner with a just-in-time philosophy? The companies who have conquered this aspect of logistics the best, like Walmart and Amazon are the success stories of the 21st Century.

Many types of inventory programs and devices that can be used to track inventory, however, they all cost money and require someone to monitor, order and make adjustments. Do we need just one person in charge? Can we afford a warehouse manager? Do we need someone to deliver parts and materials to job sites? These are all factors one needs to consider when looking at the effect of inventory on your bottom line.

The focus of this discussion is a small, but important, aspect of inventory; that is, the items carried on a repair or service truck.

PRELIMINARY CONSIDERATIONS

  1. How much time (money) will it cost to put in place?
  2. How much will we need to invest to have an adequate supply?
  3. Will buying in quantities save us money?
  4. Will it save on unnecessary trips to a supplier or warehouse?
  5. Will it prevent time lost in traffic jams?
  6. How much will it prevent unnecessary stops at the convenience store?
  7. How much do we need of any particular item?
  8. How quickly is it attainable if it needs to be ordered?
  9. How reliable are the suppliers?
  10. Can we get items delivered to our door?
  11. Will we need some backup storage?
  12. Can we prevent employees from cannibalizing one truck to fill another?
  13. Will we be able to maintain an accurate inventory?
  14. Will it save us money in the long run?
  15. What can we expect in shrinkage?
  16. Will it make us more productive?

SPECIFIC ISSUES TO RESOLVE

  1. How many trucks do we have?
    1. Are they of the same configuration?
      1. Can we store the same items in the same place in each truck?
  2. What needs to be in the front of the truck for the driver?
    1. Time sheets
    2. A “calling card.”
    3. Place for invoices for items that are purchased.
    4. Forms
    5. Trash bags
      1. Keeping the truck clean.
  3. How many trucks are focused on the same function?
    1. Repair work
    2. Installation
    3. Service
  4. Have we determined what is needed on each truck for maximum performance?
    1. Is there a base requirement of tools or supplies for each truck?
      1. Tools required
      2. Materials
      3. Supplies
    2. What would be a specialty item?
      1. Most common emergency repair?
        1. Tools for that?
  5. Could each truck be a mini-warehouse?
  6. How will it be organized?
    1. Storage areas in the truck
      1. Shelves
      2. Boxes
      3. Bins
  7. How will we track use and consumption?
    1. Manually
      1. Form to fill out
      2. Submit to whom?
      3. Periodic counting?
      4. Daily counting?
  8. Who determines the quantities to order?
    1. What is the turn on the products?
      1. How often are they consumed in a week?
    2. Do Drivers pick-up at suppliers?
    3. Who re-enters into inventory?
  9. Who tracks the prices?
    1. Savings here will lower our Break Even point.
      1. Can we buy wholesale?
      2. Can we negotiate a discount?
      3. Internet Pricing
    2. Local Supply house
      1. Quantity discount?
      2. Contractor discount?
  10. Have we set a max-min number to follow?
    1. The 80% rule.
      1. Who adjusts the quantities?
      2. When do we adjust quantities?
      3. Adjust for seasonality?

This exercise is meant to address questions that might be asked before or even after setting up inventory in a vehicle. If we already have inventory in a vehicle, is it the right inventory? Is it sitting there and not getting used because it is unknown to the other drivers? Outdated? Obsolete?

Once we have made a decision to inventory commonly used items we need to make sure it is saving us money. Fewer trips to the supply houses, less time in traffic, more billable time by employees and are we getting better pricing? We must remember why we started an inventory in the first place. SAVE MONEY and INCREASE BILLABLE TIME and INCREASE PRODUCTIVITY.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Budgeting: Under-appreciated and Under-utilized

One of the last things that most small business owners consider is doing a Budget. A large number of owners do not understand the value obtained from a having a budget. Often, when budgets are in place, they will not take the time to review them regularly or use them as a tool to guide them in the management of the Company.

Many owners look at their plan for the year as “it is what it is” regarding the sales and profits that are to be obtained for the year. They will settle for what the year brings them. We know this is flawed thinking, particularly if increased sales and profits are necessary or needed to meet your goals. A budget when used appropriately will help to guide the owner to achieve his goals.
Some of the owner’s reluctance may be rooted in the fact that his Chart of Accounts is inadequate and we have failed to discuss this or to emphasize this factor. In other words, if his Revenue and Cost of Goods are one-line items in the P & L and he does not show any revenue streams and does not track labor or materials separately; the potential value is hidden from him at this time. He cannot see that tracking these items separately and in a forward-looking budget will produce a benefit.

An additional problem may be that even if a budget is developed, there may have been not enough time spent to train people properly on the value of a budget and what it can do for strategic planning.

REASONS FOR A BUDGET

  1. Statement of goals and methods of reaching them.
  2. Defines priorities and boundaries for spending.
  3. Sets goals for Sales and Marketing
  4. Ensure that a proper amount of money is allocated for salaries, expenses, and profits.
  5. Gives the ability to monitor under-performing areas and address them before they create major problems.
  6. Ability to monitor Cost of Goods concerning Revenue and Fixed Expenses and light of past expenditures and the current Revenue.
  7. Assists in the decision-making process of when to make capital expenditures.
  8. Assist in the evaluation of the realities of the goals that have been established.

PRELIMINARY CONSIDERATIONS

As noted before, the first step must be a review of the Chart of Accounts :

  1. Do we have several Revenue streams that should be tracked separately? If so, new accounts must be created in the COA to enable them to be tracked individually.
  2. Are the Cost of Goods separated into Labor, Materials, Equipment, Supplies, Fuel, etc? If not, new accounts must be created here as well. (Remember these are all items “directly billable to the jobs”)
  3. Are there items in fixed expenses that need to be moved to Cost of Goods? Usually, some of the items are COG and need to be allocated as such.
    1. It would be ideal to get at least three years of previous monthly sales and determine the average percentage of sales for each month.
    2. Once revenue goals have been determined we can then break this down into the seasonality revenue by each month.Is there seasonality in the business? Does one month or one quarter contribute a larger portion of the Revenue?

NEXT PHASE

  1. Make a realistic estimation of the amount of profit desired or necessary.
    1. What does the business require?
      1. What would be a reasonable return on the investment?
      2. What do the stakeholders feel needs to be a reasonable return for their efforts.
    2. Fixed Expenses
      1. Fixed expenses usually remain the same regardless of the revenue. These are the expenses incurred whether we open the doors or not: items like rent, electricity, heat, insurance, licenses, interest, office salaries and office supplies.
      2. A cost of living increase, at the very least is required but in some cases (electricity, insurance, health insurance) a larger increase maybe warranted.
      3. Take into consideration any predetermined (rent, health insurance) increases for the upcoming year and any increases in the advertising or marketing budget above the previous level.
    3. Determining Revenue
      1. In establishing a budget, some will guess at the expected revenue or set the desired number that might not be achievable. However, we may be a bit more methodical if we start with our fixed expenses total and add our desired or required profit to that number.
      2. If we assume that we have increased our fixed expenses as well as our desired profit; and we assume that the Gross Profit percentage will remain about the same we can calculate the desired revenue to achieve the profit level we want.
        1. Having previously determined the new amount of fixed expenses we add to it the amount of profit also desired.
        2. If our historical Gross Profit is 28% we can calculate the amount of revenue needed to support the fixed expenses and profit level
        3. Take the combined total of fixed expenses and desired profit and divide by the gross profit percentage to arrive at the revenue required.
        4. EX. $180,000 fixed
        5. $100,000 desired profit
        6. $280,000 Total divided by the GP%. Thus $280,000/.28 =$1,000,000 or the required revenue goal for the year.

        Variable Expenses

      3. These costs will vary with the amount of revenue that is generated and they are the direct costs of doing business. Crew Labor, materials for the job, truck repairs and maintenance, truck fuel, workman’s compensation for the crew labor and supplies
      4. If previous year’s numbers are available, we can use the percentage of revenue that each expense formed as part of the overall revenue. Thus, if labor wages were 50% of revenue that would probably be a valid number for that segment of the COG in the new budget. This process should be repeated for each account in the Cost of Goods.
        1. Take into account the necessity for an increase or decrease in the number of laborers based on the revenue goal.
        2. How much of an increase do we get due to the revenue increase?
        3. Generally from year to year the percentages will be within a small range, unless a new revenue stream is developed or windfall of new work is landed.
      5. Review and Compare
        1. Look at the totals for the fixed and variable expenses and the desired profit.
          1. Then the next question asked should be, ” is that amount of revenue attainable?”
          2. If not, what are the realistic reductions in the fixed expenses or is the desired profit too high?
          3. Make Adjustments.

SUMMARY

  1. The budget should paint a picture of the future financials for the company.
  2. Setting your profit goals on paper (or electronically) will ensure that you will be more likely to attain those goals and they will not evaporate.
  3. Trying to achieve a goal without a budget will almost ensure that your goals will not be met.
  4. Budget to ensure an adequate return on your investment.
  5. Monitor the budget monthly to see that the revenue and expenses are in line so that your profit goals will be met.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Overhead vs. Cost of Goods

Cost of Goods

The importance of knowing what expenses constitute Cost of Goods and what expenses constitute Overhead are critical to establishing a meaningful Chart of Accounts. A meaningful Chart of Accounts gives you an advantage in calculating your breakeven pricing; which in turn directly affects profitability.

A good general rule of thumb to distinguish between Cost of Goods (Direct Costs) and Overhead (operating or fixed costs) is whether they are a cost directly attributable to producing revenue and are they items that will likely increase as we obtain more work? Thirdly, can they be charged to the job? Usually items like direct labor, benefits for the direct labor, and materials fit these criteria. If an item does not meet these criteria then it, more than likely, needs to be treated as Overhead.

As noted above; that all items to be considered as Direct Costs (Cost of Goods) must be billable to the job and included in the estimate. If we leave things out like supervision, costs associated with bidding, consumables or if you cannot or won’t bill them; then it may fall into the “semi-direct” category that should be a Direct Cost but now is treated as a fixed or Overhead Cost so that we can recover this expense.

If, for instance, you have an owner/manager doing some office work, some field work, in addition to some direct job supervision, you must decide on how you are going to treat this expense. Should we divide it between Overhead and Cost of Goods? If so, how much do we charge each job for the supervision? Remember that items like supplies that are consumable may be charged to the job as a percentage of the revenue. For example, if over the years we have found consumables to constitute 1% of the overall Company job expenses; then this percentage could be added onto our bid in order to recover those costs.

MOST IMPORTANTLY – YOU MUST STAY CONSISTENT!! Treat it the same way each time. Know where the costs are. Are they estimated in the Direct Cost, or are they captured with the Overhead Recovery Factor and you structure your bid accordingly.

Overhead
Overhead is operational expense not directly billable to a job. So how do we “charge” for the Overhead? Failing to recover the full costs of your Overhead in your estimating or pricing, will more than likely make your business, product or job unprofitable, when the final numbers are applied.

So, what constitutes Overhead? It is often referred to as “Fixed Costs, ” i.e., expenses that are not or cannot be included in the Cost of Goods because they do not meet the two criteria we have previously outlined. Another way to think about Overhead is to regard it as all operational costs that cannot or are not able to be billed to a job.

Generally, they do not vary from month to month (rent) or with the amount of goods or services or revenue we produce. Granted utility bills will vary slightly and phone bills will also, but as a rule they stay within a short range of expenses. They are also expenses that are incurred even if we don’t make one sale or never open the door. They are the “support systems” of the sales, manufacturing, or services that we provide. For example, rent, utilities, administrative salaries, liability insurance are all good examples of Overhead. Generally, they do not increase as we produce more work or provide more services. They are the non-direct” costs associated with running the business. However, we need to recover the cost of these items over the course of the year for you to stay in business. Failure to do so will put you out of business very quickly.

A separate account in Overhead should be set up for any office vehicles; (owner, estimator). This then enables us to charge each job or build into the estimate the costs for operating the trucks assigned to the crews. One such gray area might be job Superintendents. Are we including something in each job to cover their salary and benefits? If not we may need to treat it as a semi-direct and cost and recovery this expense as part of Overhead.

SUMMARY
Determining breakeven is essential to the success and profitability of a Company. However, to achieve this goal you must determine the appropriate classification for all operational expenses whether they be Cost of Goods or Overhead. These items must be accurately tracked in your Chart of Accounts with proper input into each account on a consistent basis.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

EXEMPT OR NON EXEMPT; THAT IS THE QUESTION!

In general, employees who work more than 40 hours a week are entitled to overtime pay at a rate of 1 half times their “regular rate” if they exceed the 40 hours. However, certain employees may be exempt from overtime if certain criteria are met. These are regulated by the Fair Labor Standards Act of Fair Labor 1938 Section 213(a)(1). In general, those exempted are classified into five positions:

  1. Employed in a bona fide executive role.
  2. Administrative role.
  3. Professional capacity.
  4. Outside salesman .
  5. Computer designers and developers. (Base salary must be at least $57,740).

In addition each position must meet certain tests in regards to their job duties.The test is usually two-fold; a salary test and a duties test. If an employee is paid a fixed amount of money; weekly, biweekly or monthly and there is no deduction from the fixed rate based on the quantity or quality of the work; the salary part of the test would be met.

The duties test is different for each of the criteria and must be considered by the actual work done and not the job title or job description. According to the Code of Federal Regulations Section 541; to be exempt an:

  1. Executive must:
    1.1 Customarily direct the work of 2 or more employees
    1.2 Primary duty is Management
    1.3 Authority to hire and fire or recommend a change in status
    1.4 Regularly and customarily exercise discretionary powers
    1.5 Spend no more than 20 % of their hours in a workweek not directly and closely related to those duties or 40% in a retail or service establishment.
    1.6 Be paid on a salary basis.
  2. Administrative Employee:
    2.1 Primary duty must be to:
    2.1.1 Perform office or non-manual work directly related to management policies or general business operations or
    2.1.2 Perform work in and educational administration which is directly related to academic instruction or training.
    2.2 Customarily exercise discretion and independent judgement
    2.3 Regularly and directly assist a bona fide executive or administrative employee; or perform under only general supervision work that is specialized or technical and requires special training or knowledge; or performs special assignments or tasks under only general supervision.
    2.4 Spend no more than 20 percent of their hours in a workweek in activities not directly or closely related to the above duties, or 40% in a retail or service establishment.
    2.5 Be paid on a salary basis.
  3. Professional Employee must:
    3.1 Primary duty must require:
    3.1.1 Advanced Knowledge customarily requiring extensive education or
    3.1.2 Originality and creativity in a recognized artistic field or
    3.1.3 Teaching or otherwise imparting knowledge as a teacher in a school or in an academic or educational institute or
    3.1.4 Theoretical or practical application of highly specialized knowledge in computer system analysis, programming, and software engineering in a computer or software occupation
    3.1.5 Consistently exercise discretion and judgement.
    3.1.6 Perform work which is predominately intellectual and varied and which cannot be standardized in relation to a given period in time.
    3.1.7 Spend no more than 20% of their hours in the week in activities not essential and necessarily incidental to the above duties and
    3.1.8 Be paid on a salary basis.
  4. Outside Salesmen must:
    4.1 Engage in making sales or obtaining orders away from their employer’s place of business
    4.1.1 Devote no more than 20% of the hours worked by non-exempt employees of the employer to work other than making sales.
  5. Computer Designers and Developers
    5.1 Engage in the application and system analysis techniques and procedures
    5.2 Design, develop, create testing for computer systems or programs.
    5.3 Design ,document, testing programs related to machine operating systems.

The reason to review this is that the minimum “basis” for salary was set at $455 dollars a week (updated in 2004). In 2014 President Obama directed the Department of Labor (DOL) to promulgate new rules regarding the minimum wages that need to be paid in order to be exempt from Overtime Regulations. This was done to “modernize” overtime exemptions.

New rules were announced in the Spring of 2016 which doubled the minimum salary required to $47,476 annually or $913 per week.

In the fall of 2016, the rules developed by the DOL were challenged by the case of Nevada vs. U.S. Department of Labor. U.S. Court of Appeals Judge, Amos Mazzant of the Eastern District of Texas issued a temporary injunction nationwide for the new rules, effectively stopping them from being enforced on the December 1st date. The DOL was found to have overstepped its authority in drafting the final rule. The Judge held that it created a rule based on salary levels and without the duties test that Congress desired.

A final ruling was later issued which permanently stopped the rules from taking effect. The only recourse left was for the DOL to appeal. With a change in administrations this ruling does not seem likely to be appealed.

On August 31st 2017, the Judge granted the Plaintiff’s Motion for a Summary Judgement holding the December 2016 rules” invalid” for eliminating the duties test and basing it solely on salary.
The DOL has asked for comments in order to form a new set of rules. New rules are expected to be drafted to raise the salary level to at least require a salary above the poverty level.

Overtime issues that arise can often be things like:

  1. Working through lunch.
  2. After hours emails
  3. Time spent going through security; before and after work
  4. Failure to track hours worked, accurately.
  5. Requirements for being at work early for meetings, updates etc. prior to clocking in.
  6. Unpaid training or safety sessions.
  7. Tipped workers reporting early to set-up tables, bar etc.

CONCLUSION
Having said all this, it would appear that change is inevitable and we should be cognizant of our clients employees and their salary ranges. In addition, it would behoove us to ensure that those on salaries fall within the “duties” required for exemption. If the salary levels are met; are the duties test also being met? We often have clients that may not be aware of the rules but put themselves at risk. The pay awarded for failure to pay earned overtime can be very substantial. Advising them of potential pitfalls is our responsibility as well as suggesting valid alternatives. Remember that paying Overtime may not be as expensive as first thought.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Familiar with the ‘Burdened Labor Rate?’

As a small business owner, have you ever wondered how to determine service charges? It is important to know exactly how much an employee is costing you per hour to do so. When calculating the hourly cost of an employee you need to be using the “Burdened Labor Rate.” This is actually different from the rate you pay an employee per hour. The burdened labor rate is an individual’s wage plus all the benefits that you give an employee or pay on the employee’s behalf.

Let’s work through an example of this! It is generally accepted that an average employee will work 40 hours a week for 52 weeks or 2080 hours in a year. A base pay of $15 per hour would result in total wages of $31,200 for the year. Having said that you now must subtract (estimated values in this case):

  1. Vacation hours -40
  2. Paid holidays (8)-64
  3. Sick days (5)-40
  4. Training Days (2)-16
  5. Idle time (15min/day)-60

The above example would bring the hours available to work down to 1,860 for the year.

Now add to the individual’s compensation all the employers’ contribution to:

  1. Social Security-$1900
  2. Medicare -$450
  3. Unemployment Ins.-$150
  4. Workman’s Compensation-$1200
  5. Health Insurance-$3000
  6. 401K -$500
  7. Bonus $250
  8. Vehicle usage or car allowance -$3600
  9. Uniforms $100

Other benefits.

The benefits paid on behalf of the employee totals $11,150.

You would then take the benefits and add this to the base rate of $31,200 which gives a total of $42,350 of compensation. Having determined that the actual hours of work would be 1,860 you would now need to divide the total burdened compensation by the reduced hours. This gives us an hourly rate of $22.77. An increase of $7.77 an hour for all the benefits we provide. It represents a 52% increase over the base wage.

You must know exactly what each employee costs the company per hour when “on the job.” On the job can vary by company, since it could mean preparation time, marshaling, equipment repair all of which may be off the job site itself. However, the “burdened rate” is the base rate we need to be using when starting an estimate. It is what the employee really costs you, and you need to recover that money for the hour they work.

To take this even further, add the Overhead Recovery Rate as you need to recover your fixed expenses. But, that’s a subject for another day! This is just a quick example of taking the concept of the burdened labor rate and applying it to a real-life scenario.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

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