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Profit Engineering Blogs

Profit is the ultimate goal of any business and should not be viewed as something that may or may not be left over at the end of a month, quarter or year.  It needs to be defined, planned for, structured, expected, or in other words – engineered. At Cogent Analytics, we know that profit is not a residual, and engineering for profitability puts a business owner in control. It is the only way a business will cover cash flow obligations and still maintain liquidity.

Profit engineering goes well beyond increasing sales.  It defines every aspect of the business and sets a clear measurement of performance.  Cogent business management advisors partner with business owners to determine break even points and then implement strategies that addresses all areas of the business to affect profit.

We stay committed and dedicated to provide Business Owners the knowledge and experience to help improve their business. Please utilize our list of resources including: Blogs, Articles, and Case Studies focusing on Driving Profit effectively into the business.

Positioning Your Business to Sell

Do you have a business to sell in the next few years? If so, then you are joining the ranks of a significant number of owners who also wish to sell.

Baby boomer business owners (born from 1946 to 1964) have started to retire, and it is having a significant impact on the business real estate market. We are in the midst of the most substantial turnover of privately owned companies in the history of our country.

By the time their owners retire, estimates say that 65% to 75% of businesses will have passed to the next generation, closed or sold. Fewer than 20% will pass to family, 18% – 35% (depending on size) will sell and about 50% will close. The majority of the past and future companies which close had/have owners who wanted to sell, but they could not find a buyer.

The state of the market is good news for buyers and bad news for sellers.

If you have spent the required time, money and energy positioning your company to look attractive to buyers, you will probably survive the glut. If you have not – and you are serious about selling your company – then you will need to push back your retirement and develop a comprehensive exit strategy.

Here are some of the things for which savvy buyers look.

  • Fair asking price – Many owners find the task of realistically estimating the worth of their businesses challenging. You should be able to prove, not guess, that your company will provide a reasonable return on the buyer’s investment.
  • Reasonable Market Salary – Buyers will want proof of your salary and bonuses for the previous 3 – 5 years. They also want to know if they can reasonably expect the same income, and that it is within industry standards.

Many owners have to delay selling to clean up their taxes and financials to show accurate, legal information – no more skimming, cash deals not put on the books or running personal expenses through the business.

  • Ability to maintain historical revenues ” The majority of buyers are looking for a turn-key operation, not a fixer-upper. You will want to show that you have kept up with capital improvements, technological innovations and facilities/equipment management. Younger buyers are interested in a well-established, well-maintained brand with a strong social media presence.

Take a good look at your products/services, customers and your position in the market. Are you selling products that are comparable to your competitors’, or are they outdated? Do you have a diverse, sustainable customer base? Who are your competitors and what is your market share?

  • Serviceable debt in 3 – 7 years ” Serious buyers will want to be out from under their debt in a reasonable time frame. You should be able to show them how they can do that. If you do not, the owner who can demonstrate to them his or her company is a “good deal” will make the sale.
  • Strong Financials ” Your financials must be in good order, and you should be able to talk about them intelligently. Qualified buyers will want to talk about cash flow, debt, profit, costs, labor burden, margins, accounts receivables, overhead and expenses.
  • Personnel – Buyers expect a functioning workforce. Take a good, impartial look at your management team and labor force – do they enhance or detract from the worth of the company? You have a much better chance of making the sale if you have documented productivity numbers showcasing your employee’s effectiveness.

An organizational chart that is too top heavy, full of nonproductive family members, low functioning shareholders, or an unbalanced supervisor to employee ratio can often reduce or end a buyer’s interest.

The baby-boomer business owner retirement wave is here, and it is going to be around for some time. Industry experts worry it may end up being a tsunami, but you do not have to get swept away by it. It is essential that you look well ahead, and develop an exit strategy which effectively positions your company to sell in a buyer’s market.

Sales Don’t Always Equal Profit

“I just need to sell more, and I’ll get out of this hole.”

“I just need to sell more, and I can retire in five years.”

“I just need to sell more, and I’ll be able to grow.”

“I just need to sell more and …………”

Ask the typical business owner what he needs to reach his goals, and the answer will be, “More sales.”

However, did you know that many owners are selling their way into a hole, out of business and out of ever being able to retire? In some cases, the more you sell, the more money you lose. It is true because sales and profit are not the same things – sales do not always equal profit.

Let’s follow the money in a simplistic example to get a better idea of how sales may, or may not, put cash in your pocket at the end of the day.

You sell three products – trowels, tomato trellises, and watering cans – from your wholesale catalog. The trowels sell for $1.00 a piece, the tomato trellises for $3.00 and the watering cans for $5.00 each.

A customer buys 1 of each product and gives you $9.00. However, you do not put it into your pocket and call it a profit. You have to subtract all expenses, costs, and taxes for obtaining and selling the products.

The trowel’s total cost to produce is $.50, tomato trellises are $3.50, and a watering can is $3.50. Your total expense for the sale is $7.50, and your profit is $1.50. Sales minus all expenditures equal profit (S – E = P). Your sales revenue was $9.00, but your profit or bottom line was $1.50 for that sale.

However, what if the next customer buys three of your tomato trellises? You lose all of the profit you have just made – $9.00 (1st sale) – $10.50 (2nd sale) = – $1.50. If tomato trellises are your best seller, you can end up with a loss for the day, week and month.

As you can see from this simple example the devil is in the details: tomato trellis profit is negative; trowel and watering can profit are positive. Business owners are continually challenged by how to balance profits, and that is how it is possible for a company to make a high volume of sales and still go out of business. It is also how selling your way out of a hole may not work, and can even make the situation worse.

So, how do you avoid making this mistake?

If the devil is in the details so is an angel. Profit engineering will help you control the numbers, rather than the numbers controlling you. Knowing how to find, document and use hard numbers is vital to making a profit. With hard numbers, you can ask the right questions and come up with the correct answers. Let’s go back to the example.

Tomato trellises – Why is my profit in the negative? How do I fix it – raise prices, lower costs, control waste, buy in bulk, improve productivity and quality? Is it cost effective to fix the problems or should I discontinue them? What percentage of sales do they represent? If the market won’t support an adequate price to produce a profit, can I at least break even on that item, or use it as a loss leader?

Trowels and watering cans” How will I increase the earnings on these products? If tomato trellises cannot be made profitable can or should trowels and watering cans offset the losses? Can they make me the money I want to make? Should I add another product(s)?

Understanding the numbers gives you the opportunity to ask practical questions, make rational decisions and implement reasonable solutions.

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:

Identity Theft: How Vulnerable Is Your Business?

According to the Bureau of Justice Statistics, more than 17 million individual American citizens are affected by identity theft. Since the larger data breaches have occurred over the past year, the larger corporations have taken notice and worked fast and furious to get their systems protected. Today, according to the Department of Homeland Security (DHS), approximately 31% of the attacks that are occurring, are against small businesses and organizations that employ 100 persons or less.

In an article published by the Identity Theft Resource Center (ITRC) ” DHS, in partnership with the Secret Service and others, said the attacks were pervasive, with ID-theft criminals scanning computer networks of businesses for vendors or employees who had remote access. passwords for network access.”Hackers then were able to run programs to attain usernames and usernames and passwords for network access.”

Identity Theft Hacker

When a small business is attacked, not only is the very livelihood of the business and its owner(s) threatened, but a small business’ employees and customers are also at risk. Small businesses are far more vulnerable to identity theft than much larger companies and corporations for the mere fact that perpetrators are fully aware that small businesses generally have more cash and/or credit available than larger corporations.

Small Businesses are Most Vulnerable If:

  • A criminal manages to ‘hijack’ or obtain your business information. They will likely acquire credit for themselves with your business information and under your business name. If your information is acquired by a thief, it’s probable that you won’t be aware until you begin receiving bills electronically or otherwise. At this point, it’s likely that extensive damage has already occurred affecting not only your reputation and business finances but your personal finances.
  • AND/OR
  • If you own a business that collects an abundance of personal information, i.e., birthdates, social security numbers, account number information or any other personal information, there are consumer protection laws that will make you entirely responsible if you’ve failed to protect your clients/customers from identity theft. At this point, your business is likely spiraling into an abyss and could easily place you in a position of losing your business entirely while facing years of cleaning up a virtual disaster. It’s a good idea to consider doing a monthly or quarterly security check-up to ensure that your systems are updated and secure.

To Avoid Small Business ID Theft Disasters Begin by Following Digital Security Best Practices as Follows:

  • Eliminate all paper billing that comes to you. Paper billing is too easy to acquire if you fail to shred it.
  • It’s not always possible to eliminate all paper billing so do yourself a favor and invest in a high-quality shredder. Even better hire a shredding company who will come to your business and pick up your paper and shred it for you and recycle it.
  • There are many businesses that absolutely must keep some paper files. In this case, consider a multiple level security filing systems. Simple, locked filing cabinets are vulnerable. Consider placing your locked filing cabinets behind closed and locked doors whereas only one or two trusted members of your personnel have access to gain entry.

As Soon As Your Paper Systems Are In Place Add These Best Practices:

  • Provide a secured internet router
  • Provide a secured wireless network system
  • Provide VPN for any external access
  • Be certain to implement strong firewalls
  • Provide protected physical access to your company’s computers and systems
  • Use automatic software (Windows or other operating systems) updates
  • Limit the software that your employees are allowed to install
  • Secure ALL offsite data storage that you use for your business
  • Continue to create multiple and redundant data backups
  • Keep an offsite copy of your backups
  • Most importantly, train your company employees with regard to digital security practices

From security inception, monitor your business credit reports as often as possible or delegate this task to someone you trust. This small act will help you immediately spot any potential tampering. If you spot it, you can stop it immediately.

Carefully Select Whom Will Have Access to Your Data:

  • Just because your company may be small does not mean that you shouldn’t secure your data like a large company. Larger companies generally implement multi-layer security systems; follow their lead.
  • Not every employee should have access to all of your files. Limit your company’s access according to the department they work in, with a trusted administrator.

Create Very Strong Passwords:

  • Almost every small business uses computer systems in order to conduct daily operations. Therefore, each individual employee must have their own employee ID and password allowing each employee their own access to the computer system.
  • Never use passwords such as 12345678 or 11111111 or 32132132. The unique, long passwords must be used.
  • Consider password tools that will create new and unique passwords as needed. Should you find that any of those passwords are hacked, you won’t have to change every password on your system.
  • When an employee exits the company under any circumstances, the administrator must immediately turn off all access to any of the employee’s accounts.

Small business identity theft is becoming increasingly serious. You must secure your systems, keep them updated and monitored. Do not procrastinate, doing so will leave your business more vulnerable by the day. Implement the best practices, and you can put your mind at ease. Failure to do so could potentially destroy what would otherwise be a successful small business. Remain vigilant and enjoy continued success.

For more statistics on identity theft and cyber crime in 2019, read this blog from broadbandsearch.net.

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:

Predictive Analytics 101

Businesses of all sizes, for decades, have been seeking answers as to how they would have the ability to improve negative business functions vastly before disaster strikes. With this knowledge, companies just may see enhanced operations and profitability.

Predictive Analytics, in layperson’s understanding; is the use of various types of data, machine learning techniques and multiple forms of statistical algorithms to assist in the identification of the future outcome likelihoods. These possible outcomes would be based on your historically provided data.

The point of these procedures is to change your company’s understanding of past adverse outcomes to seeing over and above what had actually taken place in any specific event to acquiring the best assessment, with the data provided for likely future scenarios. This will allow companies to learn from what their computers learn according to their historical input, therefore making it possible to improve decision making processes by seeing how the company has historically functioned in various aspects of the business and making appropriate changes with predicted information.

Whereas predictive analytics has been in existence for decades, these functions were best left to statisticians and math geniuses; only large corporations could afford the luxury of having these minds on staff, therefore, moving large conglomerates always significantly ahead of the game. Today, even small businesses are finding that with the continuous improvement within the realm of cloud solutions, they too are now fortunate to have the ability to benefit from big data usage.

It’s quite important to note that prior to implementation of predictive analytics software and learning the required procedures; the results would be highly dependent upon the types and amounts of data that is made available to the system. If correctly implemented, however, the return on investment can be quite impressive.

What Kind of Information is Gleaned by Use of Predictive Analytics?

Although the use of predictive analytics isn’t necessarily something that everyone would benefit from (just yet), as time moves forward, it’s expected to become a useful tool to more companies of all sizes. Currently, predictive modeling takes many forms beneficial to small and medium businesses and if the results are appropriately used, could profoundly affect profitability with:

  • Advertising searches, sales, and up-selling, potentials.
  • Highly improved marketing campaigns.
  • Forecasting potential results regarding increased revenue with various business types.
  • Forecasting how to optimize both mechanics and possible added revenue in manufacturing. (2016 Honeywell Study)
  • Forecasting and understanding new product development. (R&D Mgmt. Case Study – Electronics)
  • Forecasting possible outcomes with construction revenue. (2017 Initiafy)
  • Forecasting potential supply chain issues. (Supply Chain Brief – study)
  • Risk management
  • Cyber security
  • Fraud detection and much more

These are just a few examples. Once implemented, the level of clarification made available to decision-makers will make it possible to create far more superior operations across all aspects of the company/business. Not all decisions are equal or even have common threads in many cases. Decisions made operationally generally have right and wrong answers. That stated, while seeking answers from a strategic standpoint the findings will often be ambiguous. Although predictive analytics open discussion for both types of decision-making processes; in order to make this possible, the business would have to adapt their own modeling for both situations. Regardless, the analytics selected would need to be most suited to the needs of the company and of course, with a competent analytics team.

How to Know When Predictive Analytics Should Be Considered?

Before the implementation of predictive analytics, it’s essential for small business owners and managers to make specific identifications:

  • What would be the value of the solutions your business is seeking?
  • What are the current problems you would like to forecast?
  • What are your current internal data sets?
  • What are the outcomes your company would like to see?

Should Your Company Opt to Implement Predictive Analytics?

Discussing the implementation of predictive analytics is easier said than done. If a company would like to consider implementing this form of analytics, they must take the time to determine the following:

  • Consider the nature of the decisions your company would need to make.
  • What are the liabilities your business may face in the event the leadership team were to make inferior or questionable choices?
  • Decide the company’s best resources that would enhance the use of a predictive analytics strategy once it’s in place.

Keep in mind that the use of predictive analytics would be an extreme asset especially if the cost and the risk of a series of bad decisions would be exceptionally high. Would this be the case, it would be in the company’s best interest to explore these options. It’s entirely possible that predictive analytics could be a valuable resource to your small business if for no other reason than to improve the likelihood of efficient decision-making processes, and keep risks low in other business aspects. It’s definitely worth the exploration.

Today, however, the use of predictive analytics is used in so many ways. Overall it’s used to empower businesses of all sizes to experience a far greater degree of efficiency by having the ability to forecast inventory, how it will be used, manage various resources and of course, increase revenue, not to mention avoid the loss of revenue to the inability to see the possibilities in advance of potential disaster.

This analytics may be used to:

  • Determine client/customer purchases or responses to advertising.
  • Create risk reduction in many areas of your business.
  • Detect encryption abnormalities to eliminate cyber security

The term itself isn’t an easy description. However, the fact that it’s rapidly becoming critical for businesses of all sizes to utilize it, we would like to help educate small business owners and managers with regard to its importance to small business success.

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:

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:

Time to Start Taking 3-D Printing Seriously

There is no doubt – 3D printers have a wow factor. Whether they are creating a plastic knee joint, one-of-a-kind metal turbine blades or a chocolate pyramid, they are a marvel.

But, are they practical for the typical shop floor?
No, for the majority of manufacturing and shop business they have not been. Overall, owners have been underwhelmed by 3D printing and its applications for their products. It has failed to live up to the hype.

So, why is it time to start taking it more seriously?
We are still in the infancy of 3D printing, and its potential is nowhere close to being fulfilled or recognized. Even so, it is already in the process of completely transforming aerospace and medical manufacturing. If it is not already there, it will soon be coming to your industry.

Each generation of printers has made big leaps forward – improved scalability, faster and better-connected systems/automation, reduction of time wasting pre/post-processing, full production capabilities, expanded raw materials options, fewer obstacles to wide-scale uptake and multiple printers able to communicate with each other in real time.

Does this mean I should buy one?
No, it does not. But, it does mean is that you should start paying attention. For many industries, 3D printers have passed the novelty phase and reached the practical phase. This is the phase where owners not paying attention will start falling behind. Now is the time to create a strategy and a plan for a possible future purchase.

How do I do that?
Answering these basic questions will give you a start.

  • Personnel – Are your employees capable of using the required technology? What skills will they need? Who should be trained?
  • Financial – When and how will you be able to afford a printer? Do the numbers (profit, breakeven, margins) show it can pay for itself?
  • Product – How will your current or future product line be improved by a printer? Do you have the demand to justify the cost? Is your current equipment enough?
  • Technology – Will it integrate into your existing technology? Do you need a new digital system(s)?

Digital manufacturing and factories are the future. Owners who make the transition smartly will benefit from the promises that 3D printers will eventually keep. It is time to start thinking about how you will fit them into your company. A good, well thought out plan will make sure you do not miss your window of opportunity.

You know, like the guy who said, “Computers? I don’t see why anyone would ever want one of those in his or her home.”

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:

Experiential Marketing – Don’t Just Explore It, DO IT!

Many small business owners, whether they are just opening their doors or they’ve been in business for awhile, often find themselves lost in the digital noise, face in their hands, repeated sighs, trying to visualize something, anything, to get their businesses the attention and profits they need and deserve.

While researching these issues, the one thing that we’ve concluded is that the BOGO on Veteran’s Day or the President’s Day sale just isn’t going to cut it in 2018. We would like to offer something that appears to be trending in leaps and bounds. Now, it’s not a new concept by any stretch of the imagination. Large corporations with huge budgets have been on top of this for several years now. Small business owners simply didn’t believe they had the budgets. Not so!

We’re happy to inform business owners and your thought leaders that there are infinite ways to implement what is known as Experiential Marketing aka Event Marketing. This form of marketing can be an amazing, positive community experience that won’t only bring in clients and profit, but will create brand ambassadors and word-of-mouth beyond belief, not to mention the ability to enhance your digital marketing opportunities both through your respective marketing persons and departments and your attendees!

Experiential Marketing – is a marketing strategy that engages and therefore connects consumers with brands, live and in-person, up close and personal! As opposed to viewing potential clients/customers as those who will passively receive television/radio/online/newspaper ads, those who choose Live Marketing engage consumers through personal interaction. They bring their experiential marketing efforts live. This strategy will allow potential clients/customers to develop brand connections. These live events assist in the creation of brand loyalty, by engaging all of the senses with those who attend. These marketing strategies are also known as:

  • Participation Marketing
  • Special Event Marketing
  • Engagement Marketing Events
  • On-Ground Marketing Events (to name a few)

Take a Look at These Statistics:

  • According to a study conducted by Bizzabo; in 2017 91% over over-performing businesses have begun to emphasize experiential marketing (live events). Those same companies intend to increase their marketing budgets by at least $4500.00 in 2018 and beyond.
  • The results of a 2017 Event Marketing Institute study, conducted annually with both marketers who arrange their events and those who attend these events have provided the following results:
    • Of all consumers who have attended live events, 65% stated that by attending live events they were provided a better understanding of products and services as opposed to simply viewing TV ads or experiencing other advertising methods.
    • Of all attendees surveyed, 80% said that by attending live demonstrations, receiving free samples, etc., this strategy assisted significantly in their purchasing decisions.
    • An unbelievable 70% of live event attendees become regular clients/customer after attending the event.
    • An astounding 98% of attendees surveyed feel that they are much more inclined to purchase from the business or brand who held the event (becoming brand loyal).
    • 33% of those who attend these events will take pictures and video of the event they are attending.
    • 34% of event consumers will post information regarding their experience with the event they have attended and will place it on their favorite social media venues.

What About Marketers Who Hold These Events?:

  • According to Bizzabo; an amazing 80% of companies who use live event marketing in the U.S., say that these events have proven to be vital to the success of their companies/businesses and…
  • Of all of the marketers surveyed, 95% agree that by holding live events with their brands, they are providing their attendees a chance to step outside of their digital world and form increasingly valuable in-person relationships and connections.
  • According to Statista, 79% of those who market their business with live event marketing are experiencing increased sales.

These are some extremely impressive statistics, and 2018 will be the year for small businesses to step outside of their websites and brick and mortar establishments to use these methods that are likely to increase your sales dramatically, provide you community appearances, and likely make important differences in your local communities. This marketing strategy is in no way confined to video gaming companies or huge corporations with giant marketing budgets. It’s for you! The small business owner and even the entrepreneur wanting to get their businesses off of the ground will benefit from this method of marketing. This marketing style works for all types of businesses from the local non-profit to the Fortune 500 companies and beyond.

If you’re uncertain about how to compliment your marketing efforts, consider experiential marketing as a goal for your business in 2018! Holding one of these events could significantly change the trajectory of the public view and profitability of your business and brand regardless of its size.

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:

7 Calculations for Profiting in the Service Industry

On numerous occasions, I have asked plumbing, coating and finishing, HVAC, or glass company owners and executives, “What is it you sell?” I get a variety of answers like excellent service, best prices, superior products, experienced techs, or quality installation. “No!”, I jump up and say. “You sell labor! Your clients come to you for your expertise, so in return, you sell them labor hours to perform the needed service they require.”

Now I would be foolish to tell you these other items mentioned aren’t important like excellent service and superior products, but you could excel in these areas, still lose money, and eventually become insolvent and unfortunately cease to exist. The actual challenge in business is how you manage your costs, increasing the probability of profitability and ultimate success. Labor costs will be our focus.
Consistently “sculpting” profit ultimately determines success in everything you do. You do NOT do this by applying antiquated or “other company’s” metrics into YOUR pricing formula. Nor can you determine your price by “what the market will bear.” You accomplish success by determining your unique company metrics and utilizing break-even principles to decide what you will charge your clients and be profitable.

Using this process is not as difficult as it seems if you make the following seven simple calculations to create a valid global bidding format for your company:

From your last full year’s Profit and Loss statement, extract the following and list on a sheet of paper (or Excel spreadsheet):

  1. Total direct labor cost – direct labor consists of anyone that works for you and you make money off by billing hourly. Bookkeepers, warehouse personnel and non-billing managers do not qualify. You may need to get this from your payroll report if direct labor is not listed separately on the P & L by your accountant. Total the amount. (Deduct any vacation and holiday pay calculated as per NOTE below)Additionally, it is inconceivable to expect 100% of your billable hours to be billed thus negatively affecting your labor productivity. We have vehicle cleaning, inventory loading, answering client questions, safety meetings, and a whole host of other activities that take us away from our primary concern—billing hours. Therefore, it is prudent to adjust our available billable hours and absorb the unproductive hourly costs into the hours billed. The formula is as follows:
    For this example, we are assuming lost productivity at 15%:
    *This is known as your labor productivity rate and 85% is an acceptable approximation to be utilized if you do not know the exact number. However, if you know your labor productivity rate, use that number instead to reflect your real situation.
  2. Total direct labor taxes and expenses – FICA, FUTA, SUTA, Workers Comp, Medicare, uniforms, vacation pay, holiday pay, healthcare, and any other benefit you may offer. These are examples of “Labor Burden.” Total the amount and divide by the total direct labor amount. It will come out as a decimal and look something like this: .333 or 33.3%. Now you have your labor burden rate. Circle this in red. We will incorporate in the following segment.(NOTE: Any holiday and vacation pay calculations must be deducted from the Total direct labor calculations above to reflect specific, billable labor hours available.)
  3. Total direct materials costs – or commonly referred to as COGS. These are materials or products used in the service or installation process.
  4. Other identifiable direct costs – items that you identify and place into a bid calculation such as permits, hotels and per diem costs, subcontractors, and equipment rental. Total this amount.
  5. Other direct costs that are not identifiable – items you cannot calculate per job and add to the bid but still used and must be accounted for and incorporated into the costing process. Examples of these costs are miscellaneous material costs (nails, welding solder, etc.), credit card fees, etc. Total the amount and divide by total direct burdened labor amount (direct labor plus direct labor burden). It will come out as a decimal and look something like this again: .172 or 17.2%. Circle this in black. We will apply this Other Direct Cost Factor to every job. In other words, for every dollar we spend on labor, we also devote 17.2c (or 17.2%) on Other direct costs that are not identifiable. We will apply this concept in the following segment.
  6. Tally up all of your Direct Costs (items 1 through 5) – this is important for future overhead and break-even calculations.
  7. Tally up Overhead Costs – these are all the remaining costs (or commonly referred to as fixed costs) from the Profit and Loss statement. Total the amount. To make sure you have calculated everything correctly add the Overhead Costs to Total Direct Costs. Take this sum and subtract it from your revenue from the P & L and you should have the same operating profit as the P & L. If not then one of your calculations is incorrect. It will probably be the Overhead Costs that is incorrect. Recheck your direct cost calculations. If correct then adjust your total Overhead Costs. Once completed, divide your Overhead Costs by Total Direct Costs. The result will come out as a decimal or percentage .283 or 28.3%. Circle in blue. This Overhead Absorption Factor will be used later in the costing process.

We are ready to utilize the metrics just created in constructing a break-even format for your bidding. Here’s the scenario. You just obtained information on client requirements for a bid, conducted a take-off and came back with the following information:

It is estimated to take 385 labor hours to complete the project.

We estimate a total of $18,883.79 in materials will be required to meet the client’s needs. ($15,000 in primary purchases and $3,883.79 in support and construction materials)

Permits for this project will cost $488.75

We must rent a piece of equipment for one week during the initial phase costing $1,139.56.

We must bring in a subcontractor for critical quality control reasons before the final inspection for two days at the cost of $489.68.

How do we proceed and how much should you make? It is always good to have a profit percentage as a goal each year to direct your activities. This is key to ensuring you end up with the desired rate at the end of each month/quarter/year. We have selected, for this exercise, 12% as the goal.

This whole model is based upon meeting the projections primarily for labor and materials. Any overruns in time from mismanagement or replacement of materials from rework or miscalculations come out of “pre-planned” or sculpted profits. This holds true for any other costs running over budget and necessitates the importance of monitoring and controlling your direct costs.

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:

Contractors Should Evaluate Their Sales Force Often

Attempting to read the housing market, so far this year has become challenging at best. In 2017 nearly everything driving the housing market teetered on what would remain after the natural disasters and how the political climate would respond. By the time 2017 had come to an end, it was discovered that there was very little about construction in the housing market that had performed as forecasted.
Samantha Sharf quotes Skylar Olsen, a senior economist with the popular home search website Zillow; “We thought there would be some things to take the pressure off,” (Forbes: Housing Outlook) “That did not happen at any impactful level.” The housing industry experts had believed that the housing industry would experience rising interest rates. There would be a moderate increase in price, growth, and of course, construction in general, inside and outside of the housing market. Currently, among various experts in all areas of the housing market, there is cautious optimism that inventory may increase, only slightly. As of January of 2018, Trulia ( a real estate resource for homebuyers and renters) states that only 6% of current U.S. homeowners have indicated that they would be willing to sell their homes in 2018.

According to the Associated Press (Washington); construction is moving away from building apartment complexes to building single-family homes that will be built for ownership. In a more stable market, this would be a positive sign of economic improvement for the construction industry. However, the usual belief is that strong pricing and increased demand would also increase the demand for construction.

So far during this cycle, this is simply not an indication of what is expected.

There are apparent reasons that builders aren’t progressing as planned and those reasons are structural. For example, considering local density regulations, there appears to be an increasing lack of buildable space. The price of land is rising significantly. The demand for higher wages from much needed skilled labor has become increasingly prevalent. And in light of the newly implemented tax laws; there is considerable desire to continue to rent already existing properties, especially in more expensive markets. It’s becoming more expensive to own a home under these new laws. Hesitancy to purchase a newly built home will continue, until there is some degree of comprehension of how the home buying consumer will benefit,
Where Will These Facts Leave Contractors Financially?
With current market conditions, contractors will again need to examine how they may weather any current financial storms or those that may come in 2018. One of the best ways to accomplish this is not only by monitoring misspending and material cost control, but will also lie in educating and arming your company’s employees with your plan to increase sales.

It’s vital to begin this process by understanding the difference between sales and marketing.
It’s critically important to understand the importance of consistent measurement and management of the two.

  • Measurement – will require that you analyze and prepare a projection of what portion of your sales expenditures your company will have to absorb. Remember that to have anything at all to manage; measurement must be the priority.
  • Management – will require some research and analysis so that you may determine whether or not your product would be well positioned in your particular market. If you find that improvements could provide better positioning, the time is right now to conduct the analyses and make these adjustments (accordingly your company will be on track for the best possible success scenario this year and moving forward.

Begin by Implementing the Following:

  • Conduct a marketing study to assess your market’s position.
  • Analyze any trends and track your monthly sales and closings.
  • On a quarterly basis, dispatch your salespersons to visit and provide “shop” reports of any builders who may be competitors in your market.
  • Analyze all social media and advertising results; i.e., what are the results of your company’s paid ad sources for website traffic (per unit)?
  • How many visits is your ad source producing? How many appointments are you setting? How many organic contacts are you receiving as a result of your marketing efforts? How many of these combined contacts and appointments are converting to sales?
  • Evaluate your salespersons’ conversion ratios. Are they asking for and producing sales from referrals?

Pay Attention to Client Services:

  • During peak traffic hours, be certain that you are well staffed. Keep walk-in office hours that are convenient
  • Be certain that your sales team remains attentive to new contacts and the lifecycle marketing aspect of the sales process with every contact and all potential buyers with whom you’ve made contact.

Follow Some Proven Steps to New-Home Sales Conversions:

  • Create an escalating compensation plan for your salespersons to enhance achievements.
  • Home purchases are one of the most emotional purchases buyers will ever make. Before your salesperson meets with the client(s), be certain, that they are emotionally and psychologically prepared to sell.
  • All salespersons should expect a ‘first visit’ sale, or, a conditional sale or an appointment to revisit the possibility of the sale. At the very least your salespersons must acquire permission to recontact the potential client for a follow-up.
  • • All salespersons must be well versed in the art of demonstration, provide convincing client communications and negotiations, the ability to close the sale. Evaluate these aspects often. Rehabilitate if needed, replace if necessary.

Enhance Sales Management:

  • Worry less about hiring “experienced” salespersons. Recognize and hire the visible ‘great potentials’ and mold them to fit your company culture specifically.
  • Always train your salespersons with exceptional sales development skills.
  • Role-play sales scenarios often.
  • Take charge and lead by example with a strong purpose and sense of success and financial well-being for all in mind.

Many exceptional strategies may enhance the profitability of your business. As the market begins to improve and your sales rise, beware of complacency. Every employee, from administrator to the laborer must be trained to consistently self-evaluate to improve their positions and therefore improve the profitability and success of your company.

If you feel that your company may require these steps but are not in a position to perform the analyses alone, you may wish to consider contacting a knowledgeable business consulting firm for assistance in organizing these methods and more, to improve your company’s culture and profitability.

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:

Trend Analysis: Better Understand Your Business

A trend is a pattern in the company’s performance over time. While trend analyses are often used to determine and evaluate financial performance, they may also be utilized to highlight statistical tendencies as well. Trend analysis can be applied at any level for financial measurements and across all disciplines within the company. Typically trend analyses compare year over year performances for a given period using 3 to 5 years of data. Also, when calculating the variances between periods show the dollar amount and percentage rate. The percentage rate provides a better visual impact of the trends.

Financial analyses are the most prevalent. You should be comparing the Income Statements and Balance Sheets for critical trends. For example, if gross margin is trending down, then one of three things has probably occurred:

  1. Price points have eroded.
  2. Customer or product mix has changed substantially, or
  3. Costs have increased.

When analyzing the costs be sure to look at material, labor, and overhead separately. Increased material costs are usually easy to pass through to the customer, but labor and overhead increases often must be offset with cutbacks or improved efficiencies. The same holds true for Operating Income. If it’s down from prior years but gross margin hasn’t declined then SG&A, or some other expense is too high, and spending controls should be implemented.

The balance sheet is another area to analyze trends. Individually: inventory, accounts receivable, and accounts payable are accounts to track because they profoundly influence cash flow. Work to reduce total inventory dollars while increasing inventory turns. For accounts receivable and accounts payable, always make sure the Days Sales Outstanding (DSO) or the average number of days one waits to collect receivables is lower than the Days Payables Outstanding (DPO). Tracking these accounts and working towards a downward trend will improve cash flow and ease day-to-day operations.

Another area that trend analyses are beneficial to, is in sales. In addition to tracking monthly revenue numbers and striving for continued growth, you should also be monitoring product mix, market segments, and customer sales. Each of these can have different margins, and a shift in the mix can negatively affect the bottom line. Tracking them enables you to make necessary adjustments should new trends begin to develop.

Historical data is a gold mine. Take advantage of it and compare it to current performance figures. It’s a management tool that enables you to quickly see where to focus your time and attention. It’s a quick and easy way to identify potential problems before they get out of control.

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:

Price Resistance

Suppose that your analysis of your client indicates that the proper Labor Burdened Rate is not being used and the Overhead Recovery Rate is too low. Normally, this would require an increase in your pricing. What is your strategy when a client says he can’t raise his prices above the competition? His resistance may be the result of the client not knowing his exact operating costs. His previous pricing may have been determined by trying to be at or very near his competitors. However, this may result in not covering his overhead and thus leading to diminished profits and putting the Company at risk.

If the client is reluctant to raise prices for fear of it making him uncompetitive; this may call for a deeper look at the Company structure and organization. Some basic questions may need to be asked and the resulting answers analyzed to see if raising the prices would really be a problem.

1. What is the Company Mantra?
Do we consider ourselves a Company that provides quality services and on-time performance or have we considered ourselves the low-cost provider in the field? We probably cannot be both. If we are considered a quality provider it will be very difficult to be a low-cost leader. There is just too much expense involved in hiring and keeping quality people to always be the low-cost provider. We may be trying to compete on price when the expenses really require a price increase or in the alternative, cost-cutting. Another factor to consider here is whether we are firmly established in doing business for this customer and what is his real perception of our work. Are our employees highly knowledgeable and experienced? Do we provide extra value by doing the work correctly the first time and on time? These qualities, if presented properly, should support price increases when appropriate. If we have been sloppy in our workmanship or missing timelines, then not so much.

2. What is our bid/ hit ratio?
One possible sign that we may be bidding too low is that we are winning many more bids then we normally would for this industry. In other words, what percentage of the work that we bid are we being awarded? If it is a high percentage or we are getting a lot of work from a limited number of customers we could be bidding too low. We may be winning this work because we are leaving money on the table. If we are consistently the low bidder we may be in fact too low and we may have been able to get the work even if our bid was higher. This requires a closer examination. Whenever possible find out where your bid was in relation to the other bidders. How much higher were they than us?

3. Job Cost Analysis
The next step is to examine the numbers for the completed jobs. Are those jobs that we are winning profitable for us? In other words, we should always be examining the completed jobs and comparing them to the original bid. Take into account any subsequent change orders, but determine if those awarded jobs were actually bid properly. Did we make the expected profit? If not, why not? Was it completed on time? Did we exceed the cost of labor or materials? How much profit did we truly make? This analysis may give us an indication of the accuracy of our bidding and help us determine if we are too low in some of our pricing; thus resulting in lots of work but little profitability.

4. Are we “Lean and Mean”?
Do we have too many unproductive assets or are making payments for too many unproductive assets? These could be eating up our cash and causing us to have Cash Flow problems? Do we need to periodically add cash to the business to pay our bills? In the bid, are we including the costs of equipment to do the work? Therefore, collecting enough money to make the payments? Can any of these assets be disposed of?

5. Are the Overhead Expenses in line with our volume?
Overhead is representing our fixed expenses that need to be paid whether we open the door or not, like rent. Do we have too many personnel? Do they have productive roles in the operations? Can we get by with less? Are they doing the right jobs? In other words, where can we cut costs without disrupting the operations of the Company?

6. Have we used Break Even pricing to formulate our bids?
By this we mean have we updated the Labor Burden Rate and made sure it is accurate. Then, have we calculated and applied the Overhead Recovery rate to arrive at our Break Even price? If we then add our desired profit (by dividing by the reciprocal of that number) we can determine the proper selling price. One alternative may be to lower the price by reducing our profit. Once we have determined the Break Even price we may not need that 30% we are “adding for Overhead and Profit.” A calculation for ” pure profit” is more likely to be in the 5%-20% range.

7. Cost of Materials
Most times the Overhead Recovery Rate needs to be applied to all materials and labor associated with the job. However, in some cases where every bidder is going to price the materials almost the same because they are all using the same suppliers; we may want to recover our Overhead strictly on the basis of the Labor involved in the job. Particularly, in a job with a greater portion of materials than labor in the bid.

SUMMARY
Once all of these areas have been examined, the choices should be presented to the client. It may involve cost cutting, price increases or a little bit of both. However, all choices should be presented with a recommendation as to the preferred course of action. Maybe, we can increase the equipment pricing without having to increase our labor rates. Or, as suggested, if we can reduce our Overhead we then will be able to reduce The Overhead Recovery rate and avoid a price increase. Either way, a convincing case needs to be developed and the options presented as well as the consequences of not doing what the numbers are.

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:

Problem Solving vs Facing Challenges

“Problem Solving” is a loaded phrase: Be careful with this one, my friends. Before jumping in the deep end, I want to share something about myself that I have found to be effective. I keep a list of “loaded” words for my own use from time to time, to use as a filter to see if my communications are loaded with undesired messages that can produce undesired results. The list includes can’t, won’t, impossible, unwilling, and the most over used word is “problem”. The word itself has so many possible connotations; its use can either produce positive action resulting in real solutions or used negatively that can label a person, situation or company in a negative light leading to limitations on personal, professional or company growth.

We think our employers, prospective or existing, want problem solvers. What they actually desire is people who are ready and willing to face challenges. This is not nitpicking. Problems can be festering boils of discontent just sitting there waiting for anyone to attach blame, or to dismiss as something that belongs to somebody else, while a challenge is something that addresses who we are and who we aspire to be. A challenge requires that you face it head on, own it, and take steps to overcome it.
You can use the following steps to face a challenge and develop real solutions that promote positive steps forward.

1. Identify and define the challenge. Look honestly and objectively at the situation. If you need some help with this, you can find some very powerful ideas by starting here: strategic planning.
2. Communicate effectively while discussing possible solutions and selecting the best one. This will certainly involve assembling the right team, and possibly stepping back and letting them do the work: organizational engineering.
3. Break the solution down into quantifiable steps with measurements for success: the need for metrics.
4. Establish a time line that makes sense for achieving each step. Take the steps identified in number 3 and set a realistic goal for when each is to be accomplished, and for the motivation of your team, what the rewards might be. For a more detailed study of this step, you could start with this short article by Mindtools.
5. Maintain a healthy attitude, set the example, and get it done!

It has been said, and I believe it to be true, that a leader must repeat important principles a minimum of fifteen times before the group begins to finish your sentence for you and repeat what you have said in their own discussions. If your statements stem from honesty, integrity, and transparency, the repetition will only enhance your team’s acceptance and embracing of the mission. Once this has happened, you will be amazed at what they can accomplish. You will, by default, create a stronger and more cohesive team that is ready to take on challenges and provide viable solutions.

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:

It Is Time to Get Control of Your Money

It is baffling to experts. Why won’t business owners learn how to read, understand and manage their financials? Why don’t they want to control their money? Why can’t they realize that the better they control their money, the better they control their business?
The answer is simple – owners are human beings first and business-people second.

All human beings are illogical about a lot of things (i.e., children, dreams, spouses/relationships, jobs, politics, hobbies, goals, expectations for other people). Our emotions affect our decision-making skills all day, every day. Everyone has exhibited bad behaviors, made poor choices and acted on unsound judgments based only on how they were feeling at the time.

We are particularly irrational about money and finances. If you cannot immediately come up with five names of people who have made poor financial decisions, then you have not been paying attention. You, also, have not been paying attention if your name is not on the list. It is a given that we can be our own worst enemy when it comes to making good financial choices.

But, that is a destructive and frustrating way to run a company. There are better ways. We have all asked ourselves, “What was I thinking?” and had the answer be, “I wasn’t.”. However, that does not have to be your answer; you can change it. Knowledge is power, and it can help you get control of your money, your life, and your business.
The positive characteristics – independence, self-reliance, stubbornness – which made you a success also have a negative side. Most business owners do not want to admit when they are wrong about or do not know something. They also do not want to ask for help. But, believing you know everything there is to know about running a company is unreasonable and irrational.

This is one of the reasons owners make bad decisions in uncertain, uncomfortable or unknown situations. When they have no or poor financial information the more likely they are to make mistakes in productivity, quality, sales, estimating/bidding, inventory, personnel, salaries, etc.

When we are faced with problems our mind usually does not pick the rational solution, it picks the easiest one, the one that feels the best. But, feelings are not facts and giving feeling based answers is a very poor management strategy. They are often wrong.

Overwhelmingly, when an owner learns how to read and manage via his financials, his response is, “I don’t know why I didn’t do this sooner. It makes everything so much easier. I have all the information I need and know exactly what is going on in my company.” Your financials will immediately tell you the health of your company. When you understand and have control of your financials, you have control of your business.

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:

3 Ways to Increase Your Bottom Line

The majority of businesses who limp along do so because they are not able to generate enough cash flow to be truly successful. The lack of money is typically caused by internal problems – problems which the owner has control over and can fix. If you are willing to do what it takes there are many ways to increase your bottom line.

Contrary to most business owners’ beliefs, external forces are responsible for only a small fraction of their business struggles. Commonly, a company has money trouble because the owner will not or does not know how to deal with his operational difficulties.

But, it does not have to be this way – profit, margins and cash flow can all be increased when problem are identified and corrected. Here are 3 places to start.

Put the right person in the right job
This is a vital part of any efficiently run business. It is often ignored, especially in companies where family and friends are in jobs they are not trained or suited for. Putting people in positions they are not capable of doing affects your net profit (i.e. low productivity, increased rework and quality issues, employees’ unable to complete job duties, poor morale).
Upgrade your management skills to learn how to accurately assess your employees’ abilities, knowledge and know-how. Everyone has strengths and weaknesses; assigning people tasks they can do well makes you, them and the company’s bottom line happier and healthier.

Everyone is held accountable for their duties and behaviors
Lack of accountability is an enormous problem in most workplaces. This area alone is responsible for a lot of businesses’ poor profits – from low margins and no growth to closings and bankruptcy. If people are not held accountable to do their jobs efficiently the bottom line suffers. This includes everyone, and everyone includes you.
It is a no-brainer. When people are held accountable for their responsibilities and behaviors workplace morale, productivity, profit, quality, sales and customer satisfaction increases. While theft, rework, mistakes, waste and turnover decreases.

Communicate, communicate, communicate
One of the single biggest complaints employees have about their jobs is, “The bosses don’t know what’s going on in this place. No one knows what anybody is doing. They don’t listen to us and never tell us anything.” One of the single biggest complaints customers have about companies is, “I can’t get anyone to talk or listen to me. Their customer service is horrible.”

Poor internal and external communication directly affects profitability. Good communication will increase the bottom line and bad communication will decrease it. Billions of dollars have been lost simply because somebody did not pass on important information, talk over a problem, speak up with a concern or pay attention to a good idea.

These 3 ways a company can increase its bottom line are not the only ones available, but they are a good place start. If you do them well you may not need anything else. Business owners confirm the rewards – more time off, happier employees, less stress, a secure future, increased income, better quality of life – are worth it.

Poor internal and external communication directly affects profitability. Good communication will increase the bottom line and bad communication will decrease it. Billions of dollars have been lost simply because somebody did not pass on important information, talk over a problem, speak up with a concern or pay attention to a good idea.

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:

Gross Margin vs Markup

It’s imperative that business leaders understand the difference between Gross Profit, Gross Margin, and Markup as well as how they can affect the company. Often-times these terms are used interchangeably due to the misconception that they are one in the same. Knowing and understanding the difference prevents making decisions based on misleading information that can have a negative impact the bottom line and business!

Profitability, Income, Markup, Gross Margin, Gross Profit

Gross Profit, Gross Margin, Markup: How do they differ?
Gross profit is the total profit dollars. That is, it is simply the difference between the net sales and cost of goods sold(COGS). Markup and Gross Margin, on the other hand, is the percentage of profit; one based on cost and the other based on selling price.

Markup is the percentage of profit based on the cost. To determine the Markup, subtract COGS from net sales then divide by COGS. For example, $100 – $80/$80 = 25%. If you want to establish the Selling Price based on Markup multiply the cost times the desired Markup (%) and add the cost. Using the same example $80 x 25% + $80 = $100

Gross Margin is the percentage of profit margin based on selling price, which yields a much different result than Markup. Calculating Gross Margin is the same as Markup except you divide the Gross Profit by the Selling Price. Using the above example, the Gross Margin is $100 – $80/$100 = 20%. Using Gross Margin, the Selling Price can be established by dividing the cost by the inverse of the desired margin or (1 – 0.2)/1 = 0.8. Using the same example $80/0.8 = $100.

What is the Impact to the Bottom Line?

In reviewing the pricing examples above, Gross Margin is five percentage points below Markup. If you use Markup instead of Margin, this shortfall goes straight to the bottom line because all the other ratios for product cost (labor and overhead), G&A expenses and operating income are based on sales. Establishing pricing using Markup instead of Gross Margin has far-reaching effects. This is further evidenced in Figure 1 below comparing operating income at 25% Markup versus 25% Gross Margin on net sales of $1,000,000. In this example, using Markup results in 20% less Gross Profit and Operating Income is reduced by 50% dropping from 10% to 5%. It should also be noted that the higher the margins, the greater the spread in overall profitability.
Protect your bottom line. Always use gross margin to determine your selling prices!

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:

The Role of Chart Accounts

Chart of Accounts

The key to managing a profitable Company starts with the Chart of Accounts. It should be designed specifically for your business to give you useful and accurate information that can be used to manage your Company.

The Chart of Accounts is a list in your accounting system that defines each class of items that are used in regard to money spent or received. Generally, you will have major classifications for Revenue, Cost of Goods (Direct / Variable Costs) and then Overhead (Fixed Expenses or Operating / Administrative Costs). Under each of the major classifications should be several sub classifications such as Direct Labor and materials in COG; with rent and administrative labor costs in Overhead (operating expenses). How these items are grouped is the key to having a meaningful P & L or Income Statement. How it is formatted enables you to calculate your Overhead Recovery Ratio and recover enough money to offset your Overhead expenses and get you to a break-even point.

As stated earlier, the Chart of Accounts will also give you information to help manage your company. The amount of detail will vary by the types of business. But the amount of detail will be essential in identifying “winners and losers.” Identifying profitable revenue streams versus those that are costing the Company money and may need to be tweaked or dropped altogether. Early analysis may be a key to righting your ship and creating smooth sailing ahead. The numbers in a properly set-up Chart of Accounts can also be used to plan future Budgets and consequently your capital expenditures.

Think of the Chart of Accounts as the instrument panel of a car or airplane. You can’t drive or fly without knowing your speed, direction, engine conditions, weather conditions, etc. It needs to give basic readings that can be put together in reports, ratios or percentages to help guide the Company. Unfortunately, most Charts of Accounts are set-up with very little or no thought given to Managerial Accounting or accounting designed for internal (management) use. Most (95%) of the Chart of Accounts are set up with only one thing in mind; your tax bill. They were set up by your accountant or bookkeeper for this purpose. They are not set up for you to use as a basis for actually managing your Company. For example, placing all payroll and benefits in one account in Overhead with no distinction between Direct Labor (labor actually doing the work) and administrative labor does not allow us to determine an accurate Overhead Recovery Ratio. That part of payroll for Direct Labor is considered a Cost of Goods (Direct Cost) whose burdened payroll and benefits should have been properly bid in the job. It would not be part of Overhead.

If we put all of our revenue into one lump sum how do we tell which part of the business is profitable? If we have different revenue streams or profit centers which costs are also associated with each? These need to be separated in the Cost of Goods; separate labor, materials and equipment costs related to producing that specific revenue stream.

How do you want the Chart of Accounts formatted? Do you have different revenue streams? Can you measure the profits for each? Can you determine if it is worth being in that business? Not how does your Accountant want it to be formatted. Be assured that he is getting the same information that he needs to prepare your taxes but you will be getting far more useful information.

Overhead Recovery Rate

Once we have properly identified those items that are Cost of Goods and Overhead, we then set-up or revise our Chart of Accounts accordingly. Remember, if it is not billable to a job or cannot be put in a bid; it is mostly likely Overhead. This will then provide us with the type of P & L or Income Statement that we can use to make calculations. We can then determine the Overhead Recovery Rate that needs to be used in our bidding and pricing in order to cover our Overhead costs.

Basically, one can figure that for every dollar spent on Cost of Goods Sold, an additional “$” amount (determined by the Overhead Recovery Rate) must be added to recover the OVERHEAD. This allows a consistent application to all jobs.

The Overhead Recovery Rate may be based on either actual historical financial data or upon projected budgetary figures. Both calculations should be made for comparative purposes. Given the importance of the Overhead Recovery Rate, Revenue and all costs, whether directly or indirectly related, should be continually monitored. Don’t forget; changes in the amount of the Cost of Goods will impact the Overhead Recovery Rate because, if sales decrease there will probably be less Cost of Goods over which to spread our recovery rate. Even though, Overhead expenses are primarily fixed and therefore revenue increases or decreases will have little direct impact on them, a downward trend in sales will raise the Overhead Recovery Rate needed because there will be less COG to spread them over.
It is crucial that Overhead be monitored not only as a percentage factor, but also in terms of dollars. An Overhead Recovery Rate, expressed in percentage terms, is reliable only if you achieve the targeted revenue and maintain the associated direct costs at the projected level on which the factor is based. You must become intimate with all aspects of overhead, including not only the estimated annual percentage factor, but what the annual overhead dollar amount breaks down to on a weekly, monthly, quarterly, and semiannual basis. The capture or recovery rate of overhead should be tracked on an ongoing basis. An Overhead Recovery Rate Is Never Fixed or Constant – It Is Continually Moving and Chang

OVERHEAD (G & A OR FIXED EXPENSES)
OVERHEAD RECOVERY RATE =———————————–
COST OF GOODS SOLD (VARIABLE)

The formula above will give you your Overhead Recovery Rate that needs to be applied to recover your Overhead. In other words, dividing the Overhead by the Cost of Goods will give us the percentage that we need to apply to all of our Direct Costs in order to cover all of our Fixed Expenses or Overhead.

If we use an example of Overhead Costs of $245,000 and Cost of Goods of $529,000; we would divide $ 245,000 by $529,000 which equals .4642 or expressed as a percentage, 46.31%. The Overhead Recovery Rate would be: 47%. For our purpose, we will round up and use 1.50 as the rate. In other words, we must recover an additional 50% of Direct Costs. Or we need an additional 50 cents for every dollar of direct costs. (Remember this is not a percentage of sales, but a percentage of COST OF GOODS.) In other words, divide the Total General and Administrative Expense by the Total Cost of Goods Sold and the result will be the Overhead Rate, expressed as a percent.
In other words, once we have determined all of the direct costs in a job; labor, materials, equipment, we then must apply our Overhead Recovery rate of 50% in order to charge enough to recover all of our operating or administrative expenses.

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:

Use Your Financials to Stabilize Your Business

We’ve all heard them, and it’s true – the statistics for small business failure rates are discouraging. Depending on who’s doing the counting the range is between 75% – 90%. But, it doesn’t have to be that way. There’s a light at the end of the entrepreneurial tunnel, and you have a lot of control over whether it’s a train or not.

Contrary to most peoples’ thinking, external forces are responsible for only a small part of business failures. The majority closed because they weren’t able to generate enough operating capital to stay open, they simply ran out of money.

Businesses run out of money because the owner won’t or doesn’t know how to evaluate his financial situation and problems. He’s unprepared to be a fully functional manager. He doesn’t look past the finances of the start-up phase (short term planning) to the requirements of day to day operations (long term planning). There are ways to fix this.

Can you answer these fundamental financial questions?

What are your margins? Where are your profit centers? What’s your break-even? How much is your rework costing you? Which salesman or estimator is generating the most profit, not the most revenue? How far out is your billing? Are your receivables within industry standards?

If you can’t answer these questions with facts (no guessing), then you’re not taking advantage of all the valuable management information your financials can give you. As an owner – the buck literally and figuratively stops here – you’re derelict in one of your most important duties.

The good news is that if you’re the problem, then you’re also the solution. There are only a few real reasons (no excuses) for why businesses collapse. Not learning to read, understand and use your financials as a management tool is one of the biggest. If this oversight is addressed promptly, your business can be stabilized, turned around and positioned for growth.

Most small business owners don’t look at their financials, and if they do they don’t know what they’re looking at. They certainly don’t use them to manage. Here’s the bottom line on the bottom line – 1. You can’t expect to be successful if you don’t understand how to make a profit and 2. You have to manage your cash flow.

Every accountant, business consultant, and banker has heard an owner say as he’s trying to make payroll, “I don’t understand how this happened. How did I get here?” If he used his financials to manage, he’ d have an answer to his question, or more likely not be in the situation in the first place.

He’d understand that profit is the difference between the amount earned and the amount spent in producing a product or providing a service. Revenue is the money coming in and isn’t the same as profit. You can have revenue and not make a profit, which means running at a loss.

He’d also know where his cash was and where it was going through a cash flow statement (i.e. working capital, dates and reliability scores for receivables, next day billing tracking, daily expenses, loan and payment due dates). Even the best customer can miss a payment, stop working with you or go out of business – having control of your cash flow can significantly minimize the damage.

If you’re willing to step up, learn some new skills and consistently apply them, the monetary and non-monetary rewards are well worth it. You just might get all the things you went into business for in the first place – flexible time off, a good income, self-sufficiency, a secure future, increased quality of life and a legacy to pass on.

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:

Ruin Your Business – Use It as Your Personal Bank

Small business owners using their companies as personal banks is a common practice that has lead to thousands (at the very least) of them closing. Some owners didn’t understand the damage they were doing to their companies; while others understood, but didn’t care. Either way, too many people have driven thriving concerns into bankruptcy at worst or severely limited its growth at best.

These owners share the same misunderstanding – they don’t think there’s a difference between personal and business money. They believe the business’s money is an extension of their personal money, that it’s all their money. There are a variety of ways this thinking affects their actions, but here are the 2 most common and destructive.

Run personal expenditures through the company’s books

Many owners believe a benefit of having a business is that it can and should absorb the costs of personal items (i.e. airplanes, horses, kid’s college tuition, motorcycles, the family’s country club membership). Too often business money is seen as “free” money. They use it to provide loans to themselves and family, which they aren’t responsible for paying back.

But that’s what personal money should be used for. If an owner, or his family, has to be personally responsible for personal expenses, the chances are they’ll think and act differently about them. When the business is responsible for them, it’s out of sight out of mind.

One man was shocked to discover his business was paying for 5 family member’s cars. His bookkeeper paid the bills and he’d lost track of how many personal vehicles he was running through the books. Another man had “somehow slipped” into the business paying for the vacations he and his family took, to the tune of $50,000 a year.

The bottom line is that most small businesses can’t support the overhead of personal costs; companies regularly go bankrupt or lose the ability to grow. Too often personal expenses use the money needed to successfully compete in the marketplace: buy new machinery, hire more personnel, add a service truck, get professional help for a marketing plan or upgrade computer systems.

Use the company as an ATM

Some owners use the business as their personal ATM machine. In addition to paying themselves a salary they skim cash. Some owners take “just a little” thinking it “won’t hurt anything”. One dipped into petty cash daily for pocket money, because it was easier than stopping by his bank. He couldn’t believe it when his accountant pointed out that petty cash was costing over $1,000 a month. This was business money he could have used elsewhere.

Others take larger amounts, sometimes hundreds or thousands. A successful painting contractor skimmed large amounts of cash. However, when he wanted to expand his business he couldn’t prove to banks or investors how profitable he really was. While his books showed him in the black, they didn’t show enough volume or cash flow to repay the loan he wanted. Until he changed his behavior he was unable to grow.

It doesn’t matter how it’s done, using your business as a personal bank is short-sighted and self-defeating. Strategically used business money can be turned into higher profits, which means an increase in personal money via salary and bonuses. We all know the moral of the story; you don’t kill the goose who lays the golden eggs and you don’t ruin your business by using it as a personal bank.

(Sidebar – this article intentionally leaves out the tax problems and consequences that come from these behaviors. Those are a different discussion.)

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:

Factoring Receivables is a Death Spiral

Factoring is a transaction in which a business sells its accounts receivables, or invoices, to a third party commercial financial company, also known as a factor. Factoring is sometimes called accounts receivable financing. Businesses turn to factoring because they may be unbreakable or they do not qualify for a traditional line of credit. This option becomes their alternative and they can receive cash more quickly than waiting 30 to 60 days to receive customer payment.

When a business first begins the process, there’s a fee charged for audit and set-up of the account.

Once set-up, the Factor will advance funds immediately at the rate of 80% of current receivables under 60 days, usually by the next business day after approval. Each transaction made has a fee associated and an interest rate for the funds advanced, usually 16-18%.

Soon the company loses control over the collections of A/R, as the factor does all collections in a very strict and ridged process with the customer remitting funds directly to them.

Once a receivable goes over 60 days the Factor will deduct that receivable from any remittances due and there is, yet again, a fee for this.

During the course of the relationship, when the Factor collects from your customers, the factor will pay you the reserve balances of the invoices, minus a fee for assuming the collection risk. However, if a receivable goes bad the Factor will, of course, charge you a fee.

All fees for factoring, both disclosed and hidden, can add up to as much as 21%.

Factoring fluctuates with your company revenue. If your company is doing well it can grow rapidly with you but if your company is not it will contract just as quickly. Factoring may not be a good solution for businesses if you change based on seasonality or have other significant downward fluctuations in revenue.

To avoid all of the compounding fees of Factoring, a relatively new product, called the SBA CAP Line, has now emerged. This is the least costly means of borrowing against receivables. Interest rates are prime +2.75% (currently 6.25%) and banks like this product as they get guarantees from the Federal Government

Other options to consider include: selling assets, equipment loans on existing equipment, selling equity to investors (best option).

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:

What is the Chart of Accounts?

If we think of accounting as a “place for everything and everything in its place”, then the Chart of Accounts (COA) is the place in “place for everything.” From a managerial accounting perspective, one of the most important tools to manage the finances of a company is the Profit & Loss Statement (this may also referred to as the Income Statement or the Statement of Operations). In order for this important tool to work correctly, the COA must be structured so that it reflects an accurate mirror image of your business.

Revenue is not just revenue and expenses are not just expenses.

This is where the architecture of the COA is very important. It must demonstrate what’s happening with the business, and allow for the measurement of “margin – mix.” If a business is selling products, services and parts, the income accounts must reflect that. Expenses must be separated between direct costs associated with sales and indirect costs which the business incurs whether or not there is a sale.

For example, in the construction industry: field labor, truck gas, cement, and sand are costs directly attributable to a “job.” Management salaries, office supplies, and utilities are indirect costs. The identification of the Profit Centers is essential to understand the relative gross margin contribution of each product line in order to offset fixed expenses and generate a net profit from operations.

If you can’t measure it, you can’t manage it. The architecture of the COA determines your ability to engineer your profitability by creating a valid multi-year strategic plan, generating a functional budget, understanding your true overhead allocation ratio, and pricing correctly. Having a place for everything is the starting point. Putting everything in its place guarantees the proper characterization of your financial data in accordance with the organization of your business.

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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