By the Number$

Eeny, meeny, miny, moe; Purchase Orders save Lots o' Dough!

noreply@blogger.com (Unknown) — Mon, 11 Oct 2010 13:52:00 +0000

It is an undeniable fact! Just pick 3 of your best suppliers and implement a Purchase Order system with them and see what happens. Two weeks ago I was talking with a great customer, Dave Tucker from Sedgewick Homes in North Carolina. I paraprhase, "Every month when I review my xxxxx supplier invoices, I find billing mistakes and I wouldn't catch nearly all of those without our purchase orders as a control."

Is it that difficult to believe that our subs and suppliers make billing mistakes? It's not intentional on their part (at least we hope it's not), but the reality is that it happens. If you don't already use some form of purchase orders or subcontract documents, then are you not assuming that your vendors never make billing mistakes? We all know what happens when we assume, yet it continues on this way in many construction companies. For Dave Tucker, the amount is really irrelevant because it is still in his pocket! I guarantee you that he sleeps well at night knowing that he has not mistakenly overpaid one dime and that his jobs are on budget and will continue to be so.

A system such as this doesn't take long to implement and once it's in place, everyone in the company knows it and uses it, I promise you will never go back to the old "giving extra money away system"(GEMAS) that was in place prior to. You are already doing this work once when you are bidding, pricing and estimating your jobs, so why not take it one small step further and put it on paper. Then, use that paper to compare the bill to. I have seen too many situations where a bookkeeper is left to compare bills to a budget. You absolutely have to have a budget and there is nothing bad with this way, but my thought is that it's just a little incomplete. How much more control is there in this situation when the bookkeeper or accountant compares that bill to, hopefully, an almost duplicate details purchase order or subcontract? Hundreds times more, thousands times more? I guess that depends on how many mistakes your vendors make on their bills.

So, the question of why you would not keep GEMAS in place in your company should now be answered. The only question left is WHEN are you going to replace it?

Read the Story (Ch. 2)

noreply@blogger.com (Unknown) — Thu, 23 Sep 2010 19:51:00 +0000

Well, we left off last week with some questions to your business $'s and a reference to "Benchmarking" your business' key financial numbers. Benchmarking, in a nutshell, is a comparison of your financial performance versus another company's, preferably in your same or similar industry. However, let's not get the cart-before-the-horse. Let's take a little closer look at some of those pesky questions we asked in the last post.

Starting with the first question, "Do we have enough cash", what do we need to look at or calculate to figure this out or even think about a comparison in our industry? The hint is in the words "cash" and "debts",
otherwise known as assets and liabilities. Expand the cash to include current receivables and then take all of your "current liabilities"(debts to be paid in less than 1 year) from a recent Balance Sheet. Divide your Cash+Receivables by your Current Liabilities and you hopefully get a multiple instead of a decimal.

Ex: $150,000 / $60,000 = 2.5

This is what's called the "Acid Test Ratio" or "Quick Ratio". There are a couple of other variations of this ratio, but essentially it's a measure of Liquidity of a business. Now, don't panic at this number if you run it and get a 0.35 or something below 1.0. In the current business market for some industries this may not be out of the normal industry range. Liquidity is just one measure of a business' financial prowess and should not stand on its own. However, it should be tracked and be a part of any trend analysis that you do to monitor the changes in liquidity your business experiences. The key point: simply look at it and try to understand why it is where its at. If it's too low, it could be an indicator that you don't have enough new sales happening even if your Gross Profit Margins are between 30-50%. If it's too high, it could be skewed by high, overdue receivables balances, which we all know affects cash flow and ultimately our ability to pay overhead and debts.

So, again it's just an indicator that can mean different things at different times. See, that wasn't so painful. It's amazing what a few simple calculations can begin to tell us. Now go get that balance sheet (maybe 2 or 3 different periods) and calculate your Acid Ratio so you can start running your business By the Number$.

Stay tuned for more insight...

Read the Story & Take Action

noreply@blogger.com (Unknown) — Thu, 16 Sep 2010 15:22:00 +0000

Ever sat down and read inspirational material? Any self-help or motivational business books from industry gurus and ultra-successful President's, CEO's and Sales People? Of course you have; We all have at one point or another. The real question is what did you do with the information. Most of you probably took some sort of action with specific recommendations from the books or videos, which is great. So, have you ever read the story of your business?
How often do you re-read that story? "What story?", you may ask or "Why would I read something more than once?". Your business has a story and it tells it to you (some of yours are screaming at a very high pitch) every single day. It adds a new chapter every single day. Are you reading it or listening? Do you see it, understand it and hear the heartbeat? **Hint: It's the number$.

The numbers of your business are a very telling story and right now is the time to start reading, analyzing, understanding them and then taking action on what you learn. I could quote a hundred cliche's on seizing the moment to drive the point home, but I don't think I need to. I believe deep down many of you reading this already know this is something you need to do. So, why don't you? There are many reasons I hear including fear of admitting you understand it, not enough time, if sales are good it doesn't matter and, my favorite, I'm just not a numbers person.

The nagging question in your mind now is maybe, "What are the numbers going to really tell me and what actions will they lead me to take?". I'm glad you asked.

Owner to Business $:
"Do we have enough cash to cover our debts consistently? If no, why not?"
"Are we utilizing sales dollars or debt to fund our jobs?"
"Is the business meeting my Gross Profit & Net Profit goals?"
"Do we have a good position to buy new assets or get some new credit?"
"Do we have enough work in process to meet our sales goals for the next 2 years?"

Business $ to Owner: "I know all of these answers if you're willing to spend some time with me."

I simply encourage you to make the time and take some action in this area. It will help you look at the past, present and most importantly, plan for the future of the business. Once you learn how to do this and master it, you can then start to "Benchmark".

Stay tuned for the next Number$.