Spring Is The Season Of Decision

As every small business owner knows, spring is the season of decision. The reason is that business owners are far along enough into the year to modify issues that exist within the business. They are open to being crippled for, at a minimum, the majority of the year.

What are the critical variables in a business that must be under control in order for the business to be successful? The most critical variable in any business is control. Control is the ability to determine what areas of concern exist within any business and then take immediate action to modify these concerns. A classic example is rising labor costs. It is incumbent on the business owner to take action in order to modify this increasing cost as a percentage of his revenue. To do this, one must have the requisite controls in place to know when and why labor costs are rising.

When discussing the rising costs of individual expenses, it is necessary for the business owner to understand the percentages. In other words, if revenue has increased from $2 million to $3 million, and labor cost has increased from $250,000 to $300,000, based on percentages, the business has done well. If, on the other hand, a business remains constant at $2 million while labor costs increase from $200,000 to $250,000, there should be major concern. $50,000 in increased labor cost, excluding the potential of more labor intensive versus material intensive, will cause the bottom line profitability to be reduced by the sum of $50,000.

In order to attack head-on rising costs of any type, it is necessary to understand specifically how much and why the costs have risen. Reasons for rising labor costs could include:

• lack of productivity
• increased equipment or machinery downtime
• increased overtime or increased vacation time
• lack of productivity from new employees
• lack of proper training and/or motivation
• lack of an organizational structure
• lack of job descriptions
• lack of responsibilities
• lack of a clearly defined authority
• lack of a system to allow the labor costs to remain, at worst case, stable
• poor scheduling
• poor forecasting
• lack of a company plan
• poor communication
• lack of a quantitative study of function
• management by expediency, rather than by plan
• menial work pressed upwards to the owner
• too much time devoted to putting out fires
• lack of a productivity-based excess profit incentive plan

If all of these specific items have an impact on labor costs, such as through productivity inefficiencies, then one can easily see the many variables that must be attacked in order to reach the point where labor cost remains constant or declines. Look at other aspects of the business such as material costs. There are a great number of variables that must be managed and controlled to contain the material costs and assure a minimum profitability that will flow to the bottom line. Variables that determine material cost include:

• purchasing and/or lack of a purchasing system
• lack of a system to determine the quality of the items purchased
• lack of a system to determine the price paid
• lack of a system to determine theft or pilferage
• lack of a system to determine waste
• lack of a system to determine inventory and inventory control
• lack of a system to determine how to take advantage of quantity and term discounts

With so many variables on each cost, not only on material and labor, but on other costs associated with the business, it is required the business owner know, control, manage and minimize each cost. Business owners sometimes lose sight of the fact that a 2 cent increase in material costs, from 36 to 38 cents on a dollar causes the profit of the company to go down by 2%. If this cost is passed along to the consumer, then the percentage remains the same. Now the issue is whether sales and marketing can remain status quo in relation to the newly modified competitive position within the marketplace.

Another area of concern that must be managed and controlled is estimating. One needs to understand true cost, which incorporates all of the costs of a business. This includes the costs of the manufacturer, distribution and the costs of providing a service, in order to determine the true cost. Other areas of concern include utilization of competitive edge and utilization of break-even. That means that once the company reaches the point of break-even, they should utilize the concept of super market penetration, super profitability or a hybrid of the two.

There are more areas of concern including a check and balance system in estimating, utilization of procedures in estimating, utilization of a methodology to control human error and controlling cash. In order to control the cash flow, not profit, it is necessary to monitor, control and manage the cash flow analysis, its accounts receivable, accounts payable and progress billing. It is also necessary that the credit of the business is proper in relationship to long-term financing versus short-term financing. Does the business have departmentalized accounting? Does it have reasonable budgets? Does it have a company plan and contingency plan? Does it treat profits as a residual or the first item of expense? Does it employ proper utilization of depreciation?

In order to manage and control all of the before-mentioned costs, it is mandatory upon the business owner to produce various reports that set forth what areas of concern within his business are not being managed properly. They should be managed to the benefit of not only the company, but each of its employees and everyone that comes into contact with the business.

Clearly, the first report that a business must produce is a profit and loss statement on a given basis, once a month, quarter and year. Clearly, once a year is totally ridiculous and makes no logical sense. That is comparable to baseball standings that you only see after the season is over. Once a quarter is almost as ridiculous because that means that business owners only have four times a year for the opportunity to modify the eventual outcome of the game of profitability. Thus, at an absolute minimum, a monthly profit and loss statement is necessary. This profit and loss statement must be compiled internally and must be accurate by taking into consideration annualized expenses, such as depreciation, in order to be certain the numbers set forth in the profit and loss statement are, in fact, accurate.

The number one function of the business owner is to get a group of people to work together harmoniously to produce a given product and profit.

An accounts receivable aging report is next. How can receivables be managed if they are unknown? The owner must know who’s paying, who’s paying on time, how long clients are taking to pay and that they can properly control cash flow and cash management within the planning model. They must also have an accounts payable aging report to know whether they are taking trade discounts and whether they should be inclined to seek lower pricing from their suppliers.

Job costing reports are needed for each endeavor in order to ensure that estimating and profitability are accurate. A job estimate report is also needed to determine that each job is in compliance with the original estimate. If it begins to get out of control, learning at the end of the job that money was lost, is never in a company’s best interest. A statement of change setting forth specifically and precisely what has happened to cash flow during any given cycle is necessary. This sets forth exactly where the money has been reinvested back into the business, where depreciation has been reinvested and the various other items that make up the statement of change, such as receivables, payables, work in progress, profitability and others.

As I hope you read this a second time, you should come to the understanding that managing a business is extremely complex. There is very little difference between managing a business and managing a professional sports team. Motivation is important. The selection of players and the selection of employees are extremely important, as is proper training. Proper utilization of players, or employees, that are in the right positions is extremely important. Proper delegation of authority and defining of responsibilities is also extremely important. In addition to that, it is required of the professional sports team manager, or the business owner, to produce the statistics to know where they stand, how they stand and what can be done to modify the eventual outcome of his endeavor.

The last thing I’d like to discuss is what the owners’ function of any business should be. I think we lose sight of what our function actually is and what the goals and objectives have to be in order to reach the point of success. If anyone believes their business should be as successful as possible, but does not yet contribute as much as possible, then how can they expect to receive the maximum benefit, profitability, ease of operation and cash flow.

After several years of establishing my first business, I came to the resolution that I needed to find my purpose and function as the entrepreneur. I’ve determined that the following function of entrepreneurship has come from years of analysis and many years of investing blood, sweat and tears in my various business endeavors.

The number one function of the business owner is to get a group of people to work together harmoniously to produce a given product and profit. How can one expect to maximize efficiency and productivity if we’re not at the point where we are harmonious? The end result for any entrepreneur is to produce a profit. A sales manager’s responsibility is to produce more revenue. A manufacturing job superintendent’s responsibility is to increase productivity. But, as an owner, the entrepreneur’s responsibility is to produce a profit.

The second function of an entrepreneur is to manage, or control. However, in order to manage, it is necessary to have information to act upon. You must produce the requisite reports, as simplistic as they may be, in order to be sure where your company stands at any given point in time.

The third function of an entrepreneur is sales. You must not sell only the product itself, but the company’s success and why others would want to be involved with it. This includes not only your employees, but your customers, purveyors, financiers and banks. It involves all others as it relates to your business. It is perpetually necessary to convince others that your business is the right place, and now is the right time for people to be involved.

The fourth function of a business owner or an entrepreneur should be to utilize the organizational structure. As we had previously discussed, organizational structure has many and varied facets. It is essential that each entrepreneur keep it well oiled and properly defined in order to best serve the company.

The fifth function is to appropriately plan for tax avoidance and utilization of profit. It is extremely important that you minimize your obligation to the IRS, without taking any risk, and certainly without ever doing anything outside the bounds of the law. Take advantage of every opportunity which the Congress has allowed, as it relates to minimization of tax in regards to the encyclopedic 40,000 pages of the tax code. It is your obligation to understand and comply with the code. Similarly, it is the responsibility of the owner to determine how to utilize his profit. So many companies make such minimal profits that they really have to be concerned about how to utilize them. Once you begin to produce them, by controlling the critical variables within your business, it is necessary for the business owner to enjoy all the fruits of his labor.