CFO Services – The importance of tracking Direct Labor Hours

If you are a company in the trades or manufacturing there is no metric more important to track than direct labor hours. As a Part time CFO performing CFO Services I find that the most important metrics to properly evaluate the performance and productivity of a business in the trades as well as a manufacturing business involve direct labor hours.

Direct Labor Hours are defined as hours worked by those employees who work on the actual production of a product or who work on performing the service. Sometimes this can be tracked from payroll records, however payroll records may include travel time and down time. If possible it is best to exclude travel time and down time and account for that time separately.

Some of the key metrics I like to track are as follows:

Sales per hour – Calculated by taking sales and dividing it by Direct Labor Hours. Through this metric you will be able to identify if your pricing has integrity and you will also be able to tell how efficient your direct laborers are.

Overhead per hour – Calculated by taking your total overhead and dividing it by direct labor hours. Through this metric you will know what your overhead cost per hour is and apply that overhead cost per hour to your selling price to make sure you are covering your overhead. The small business owner is always confused on how to make sure overhead is covered in their selling price.

Material Cost Per hour – Calculated by taking the cost of the materials needed to produce the product or perform the service and dividing it by Direct Labor Hours. When this metric is too high it can mean that you are inefficiently consuming materials or it can mean that you are not buying effectively (prices are too high)

Direct Labor hours are the heart and soul of managing a business in the trades or a manufacturing business. By tracking Direct Labor hours you will identify key metrics so you can evaluate the performance and productivity of your business. Utilization of metrics will help you be able to spend more time finding new business. Your Part time CFO will be able to help you calculate metrics.

Accountability

As a Part Time CFO I find that business owners making people accountable for their performance is lacking more and more and as a result more of the burden of accountability is falling on the business owner. Since the business owner is responsible for everything that happens in their business, the buck stops with the business owner. This additional burden of accountability is not only unproductive to business owners, but it is negatively affecting the bottom line as well. One person simply cannot do it all!!! Therefore people have to be held accountable!!!

What causes a lack of accountability in an organization?

Primarily 3 things (not in any particular order)

1. Inaccurate and untimely financial statements - The financial statements are the scorecard of any business and are the supreme measure of business performance. If the financial statements are inaccurate or untimely then how can performance be measured properly? If performance cannot be measured properly how can one make anyone accountable?
   
   
2. Fear of Loss of the Employee - If the business owner thinks very highly of the employee and the business owner looks at the employee leaving the company as a detriment to their business they will deflect as much pressure and accountability away from that employee as possible.
   
   
3. Lack of having a strategic plan - Without a strategic plan the business lacks direction. When a business owner has a strategic direction that they can communicate to the rest of the organization it gives employees the reason to be accountable. An employee will not be accountable if they are not given a reason to be accountable. The strategic plan consistently applied gives the employees reason to be accountable. Consistency in the strategic plans application is critical because if the strategic plan is inconsistently applied or changed often accountability is sure to break down.
   

Having everyone accountable in an organization increases the bottom line, increases the value of the business and allows the business owner to sleep nights!

A CFO Entrepreneurial Lesson Learned

Don't let your small business make you small minded.

This is one of those tough lessons I learned this week. I am an entrepreneurial CFO. This means that I am a Part time CFO that performs CFO Services and my background consists primarily of owning and operating small businesses all through my career. Even now, in addition to my CFO practice I co-own a property casualty insurance agency with my partner.

What I learned this week is that as a small business owner we can become small minded. What I also learned that a large part of what drives that small mindedness is self doubt.

Here is my story:

Back in 2002 I put together a business plan to create Virtual Trade Shows. These virtual trade shows would help small companies who cannot afford to attend or exhibit at important trade shows an opportunity to attend over the internet.

Here is an excerpt of the concept from the Executive Summary:

"Tradeshowsonthenet.com, Inc. ("TSON" or "the Company") was created to streamline commercial trade shows and make them much more cost effective and more productive to the participant. The trade shows would take place on the internet providing both exhibitors and attendees with more capabilities and tools in order for them to accomplish more at a lower cost than they would if they all were actually at an exhibit hall. The Company's purpose is not to eliminate trade shows, but creating them in a virtual environment while maintaining all the advantages that trade shows afford and increasing efficiencies, data and participation."

As I reflect back on why I did not pursue my business plan, I remembered I was fraught with self doubt. Self doubt that I could not raise the money, self doubt that I could not come up with the technical programmers, Self doubt that the idea was before its time and so on.

Last week I received an email from On24 a company among other things creates and builds virtual trade shows. They have 3 Venture firms on their board and look like they are doing extremely well. I saw pieces of their latest virtual trade show and it is exactly what I envisioned. Evidently the founder of On24 had no doubts about raising money, finding programmers and the timing of the project.

I had prepared and executed business plans before but they were on a smaller scale. I let a small business mentality make me small minded and I let self doubt prevent me from executing this plan.

The take away here is:

Wouldn't it be a shame if self doubt prevents you from serving the world!

CFO Services – What Are Rolling Forecasts?

One of the more important CFO Services is Business and Cash Flow Forecasting. This CFO Service gives the business owner the foresight to take action. Many business owners operate their business on a day to day basis without any business and cash flow forecasting and without thinking about what is going to happen next month, next quarter or even next week! As a result they never understand the benefits of business and cash flow forecasting and guess what? Their competition does understand the benefits. Their competition understands that business and cash flow forecasting:

• Reveals weaknesses and strengths in your organization.
  
• Finds solutions to solve those weaknesses and improve on those strengths.
  
• Helps you to learn more about your business.
  
• Helps you to be proactive about addressing potential trouble down the road like for example, a cash flow problem.
  
• Makes people in the organization accountable
  
• Gives the business owner piece of mind
  

One of the problems with business and cash flow forecasting is that once the forecast becomes 30 days old it is stale, outdated and most times forgotten. To address this problem the state of the art CFO performs what are called rolling forecasts. Rolling forecast capability allows one to enter actual results for the most recent month and then the rest of the forecast rolls forward for the next 12 months. This is called a 12 month rolling forecast and should be done every month to keep the forecast current. I usually prepare a 24 month rolling forecast for my clients to get a longer range perspective of where the business is going. With these updates the CFO and business owner can make changes as needed as well as identify any other problems. The rolling forecast makes the forecasting process a monthly occurrence and a monthly planning process that adds tremendous value. With my clients I also combine the results of the rolling forecast with an analysis of the key performance indicators for the month.

With tools like the rolling forecast, the business owner can be on top of their game and gain a competitive advantage against the many business owners who do not do so!

CFO Services - Another Cash Conservation Strategy

As a Part Time CFO performing CFO Services it is my responsibility to identify all the ways a business can conserve cash. This includes providing cash savings guidance for services I do not perform. The best example of this is during this time of year I always advise my clients to have their year end tax planning meeting with their CPA or Income Tax preparer.

These year end meetings many more times than not help the business owner reduce their current year tax liability and conserve cash flow for the business. Certainly most of the strategies evolve around purchasing vehicles, equipment or some type of fixed asset before the end of the year, but there are other year end strategies especially for cash basis taxpayers that are discussed like paying as many expenses as possible before year end and the proper timing of the year end billings.

Virtually every CPA or Income Tax Preparer provides these year end tax planning sessions. They usually last no more than an hour and can even be done over the phone and it can be the most profitable hour in November/December that you will ever spend.

A CFO should have many resources to help the business owner through these challenging times. One of those resources should be good CPA’s and Tax Preparers. If you are in need of a good CPA please feel free to contact me.

Michael Barbarita

Next Step CFO

CFO Services

781-326-3822

yourcfo@nextstepcfo.net

CFO Services - An Option to Consider

As a Part time CFO I run in to situations where business owners are relocating. I always liked the strategy of owning the building you do business in. The way I look at it is you have to pay for facility costs one way or another you may as well build equity through the facility payment.

One mistake I made is with an insurance agency that I have an ownership interest in. I have had this equity interest since 1983. We kept leasing the same office space for years. We paid almost $700,000 in rent in 27 years. If at some point in the process we bought the property we would have probably still paid about the same in facility costs, but we would have enjoyed tax advantages and today we would own an asset that has resalable value. This is the typical falling asleep at the wheel scenario.

Even though the real estate market is down I still believe the right thing for business owners to do is own their building. SBA 504 programs are providing good financing options and believe it or not banks love to do them. The SBA guarantees a large percentage of the loan among other things so the banks are all in on that. However if you cannot finance a purchase today a lease with an option to buy can be a very productive strategy. Through a lease with an option to buy:

• You are not committing to a purchase
  
• You are controlling the property and it cannot be sold from you
  
• You can try the property to make sure it fits your business needs before you buy
  
• You have time to work toward a down payment
  
• You can lock in a favorable option purchase price in this current real estate market
  

Sometimes you have to make a nonrefundable payment for the option but in this real estate environment that can usually be negotiated. Keep in mind any nonrefundable payment you make toward the option should go toward the purchase price should the option be exercised.

With the aforementioned advantages of ownership a lease with an option to buy could give you the opportunity to purchase an asset for your facility dollars instead of accumulating rent receipts.

Exploring different avenues when locating can be one of the many valuable CFO Services.

CFO Services - Excess Cash

As a Part time CFO from time to time I get requests from clients as to what to do with excess cash flow. I know it sounds strange during these challenging economic times, but some companies do produce excess cash. This can occur if business is really good or just from a seasonal fluctuation in a seasonal business. When these situations occur we have a tendency to think only about putting the money in an interest bearing bank account. However, if you have seen money market and CD rates lately you know that if you can get an interest rate of 1% per year you are lucky and this does not seem to be changing anytime soon.

Here are some things that can be done with excess cash:

1. Call all Trade Vendors to see if they will offer early pay discounts. Some offer them as a matter of policy but I would make a phone call to them anyway to see if they would accept a higher discount. After all you may be inquiring at a time where they need cash.
2. Call the Landlord and see if he will give you a discount for prepaid rent.
3. Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
4. Pay down your line of credit as long as you can dip back into it and the bank doesn’t freeze your line as you pay it down.
   

If you think about points 1 thru 3 these are operating expenses you have to pay any way in the near future. It is not like paying the credit line which is additional dollars outside of ordinary operating expenses. That is why with respect to the credit line I suggest you make sure you can borrow back into it.

I think it is very likely that the aforementioned four points will yield appreciably better results than an interest bearing bank account.