Category: Uncategorized

Preface: Accounting approaches are not created equal. It’s like suit coat shopping; you have choices, ‘tailored-services’ or ‘off-the-rack’.

Questions are the Strategic Runway Towards A Great Business (Segment IV)

Credit: Donald J. Sauder, CPA | CVA

There is a day approaching when your business will need an accountant; ok, no new news there. Whether you’re an early year’s entrepreneur or working in a traditional family enterprise, trusted accountants have their place in service to every business.

The role of accountants has changed in recent decades from only keeping books or preparing tax filings, to more of an advisory position. When you have the budget, a large accounting firm can seem like a right choice, but there are always risks that you will get an ‘off-the-rack’ accounting service versus an accountant with a ‘tailored services’ approach who will genuinely listen to understand your business goals, aspirations, strategy, and needs as an entrepreneur. Only then can you obtain optimal solutions. Accounting approaches are not created equal. It’s like suit coat shopping; you have choices, ‘tailored-services’ or ‘off-the-rack’.

Tethering your business to a great working relationship where you can build trust is vitally important to get the most from your trusted advisors. To maximize value from your relationship with an (accountant) advisor, you need to be comfortable communicating on a effective and trustworthy basis and feeling confident with the professional judgments of the advice.

The best accountants look at what’s best, not only for the business, but also for you, the owner, and your team. The ‘right’ accountant is usually not a universal ‘one size fits all’. If business is simply a Dutch Blitz game, there is a substantial difference between a cheerleader and an expert coach.

When you are building a business, of any size, Luke 14:28 tells us why excellent accounting is of utmost importance. “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’

Whether a journeyman in business or a businessman, now ask yourself the following business self-assessment questions for Accounting and Taxation. If you answer any question “NO”, then follow-up and ask yourself – “WHY NOT”? Document your answers, concisely. Answering “NO” isn’t necessarily wrong, but you should know “WHY NOT”?

Accounting | Taxation
1. Does your executive team continuously collect, track, and analyze key financial and operational data?
2. Does your business prepare an annual budget?
3. Does your business have three to five-year financial projections?
4. Does your business have a plan to effectively manage debt ?
5. Does your business meet annually with your banker?
6. Does your business have seasonal cash flow challenges?
7. Does your business have a line of credit with an outstanding balance?
8. Does your business monitor the equity to assets ratio?
9. Does your business regularly monitor and track working-capital levels?
10.Does your business track and manage overhead cost variances and expectations?
11. Does your business calibrate costs of production or customer service at least annually?
12. Does your business have a travel policy?
13. Does your executive team track key performance business indicators weekly?
14. Does your business plan strategic capital expenditures?
15. Does your business have target ranges for cash and working capital?
16. Does your business have satisfactory conversations with your accountant each year?
17. Does your business consider tax filings to be relatively stress-free?
18. Does your business have a sales tax compliance plan?
19. Does your business maintain appropriate compliance with multi-state income taxes?
20. Does your business have a high level of confidence in your tax filings and income tax compliance?
21. Does your business invest in annual tax planning?
22. Does your business obtain quarterly or annual enterprise financial statements?

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Preface: “Don Feldman’s success as an Exit Planner rests on three essential elements. (1) Don “gets” the needs of business owners. (2) He has created and constantly adds to a tool box chock full of proven planning strategies and ideas. (3) His ability to deconstruct, demystify and explain complicated tax and valuation issues in a way that owners–and even attorneys like me!–can understand.”— John Brown, Founder, Business Enterprise Institute, Denver, CO

What You May Get Wrong About Business Valuations

Credit: www.keystonebt.com

Business valuations are important to successful planning. They tell you what your business is worth to a potential buyer. Though business valuations seem simple on the surface, even the smartest and most successful business owners can misinterpret their importance.

Business valuations generally tell you two things. First, they tell you whether you can sell or transfer your ownership, right now, and achieve financial independence. Second, and more importantly, they tell you how much more work you must do to build your business’ value to achieve that financial independence.

Financial independence is the most important goal of planning for your business’ future. Other goals are important. But by definition, an Exit Plan must give you financial independence to be successful. It’s likely that your business is the most valuable asset you hold and thus will play a huge role in achieving financial independence. Knowing what it’s worth and what you must do to build its value is commonly the bedrock of a successful plan for the future, whether you intend to exit or keep your business forever.

Consider the story of Luca Montez, a business owner who made some common mistakes about business valuations, and how his mistakes affected his planning.

Luca Montez had owned his widget company, MontezCo, for 35 years. He was an integral part of the company’s success. When his acquaintance and friendly competitor, Julia Deming, told him that she was selling her business, Luca started thinking about his own retirement. He was very excited to learn that Julia received $6 million for her business. He saw their businesses as similar and figured he could get that much, too.

Julia offered to put him in touch with some of the advisors that had helped her, but Luca politely declined.

“No, that’s too expensive I bet. I know what my business is worth now. I think I can handle it.”

Luca decided to put his business on the market. The highest offer he received was for $2 million, much lower than what Julia had been offered. He became frustrated and asked Julia to put him in touch with some of her advisors.

When Luca met with the Advisor Team, he vented his frustrations.

“My company is bigger than Julia’s. I work with some really well-known customers. I put a lot of work into making this business successful. Why am I not getting the same $6 million as Julia, if not more?”

After a few meetings and a lot of questions, Luca grudgingly agreed to get a proper business valuation. He had resisted for quite some time because he was convinced that his company was as valuable as Julia’s, and he didn’t want to pay for a formal “opinion of value” at top dollar. His advisors instead suggested that he get a less expensive “calculation of value” from a business valuation specialist.

Using a calculation of value process, Luca’s business valuation specialist said that Luca’s business was currently worth $2 million, just as he had been offered. She explained that the company had three glaring weaknesses.

1.      It was too reliant on Luca for its cash flow.

2.      It worked with three well-known customers, but those companies represented 80% of MontezCo’s annual sales.

3.      It didn’t have a management team that could run the company without Luca, so a buyer would be stuck with Luca for several years or provide their own management team.

Once Luca learned these facts, he and his Advisor Team knew they needed to get to work. They began to install next-level management. This made the company less reliant on Luca. The management team also knew how to diversify MontezCo’s customer base. As the company grew, Luca created incentive plans to keep his best managers tethered to the company, with help from his advisors. It took several years, but Luca managed to build his company’s value and get the $6 million he wanted and needed.

Business valuations can guide you toward several answers about the future of your business. Perhaps most importantly, they can tell you where you are financially, which can guide you toward what you must do to get to where you want to be.

If you’d like to talk about strategies to position yourself to achieve financial independence through your business, please contact us today.

Donald Feldman: www.keystonebt.com

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor.

This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need. This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by Keystone Business Transitions.  Examples include fictitious names and do not represent any particular person or entity.

 

 

Preface: “A year spent in artificial intelligence is enough to make one believe in God.” —Alan Perlis

Questions are the Strategic Runway Towards A Great Business

Credit: Donald J. Sauder, CPA | CVA

The value of data is only beginning it strides to connect the world networks of business, as it leaps into the next generation fields of innovation. The insightful analytics per predictive business intelligence systems are more rapid than gradually to change the landscape of enterprise and decision making, e.g. business.

Power BI is a business analytics service by Microsoft. It aims to provide interactive visualizations and business intelligence capabilities with an interface simple enough for end users to create their own reports and dashboards.

Quote: https://powerbi.microsoft.com/en-us/blog/announcing-new-ai-and-enterprise-features-for-power-bi/

In a world in which data is coming from everywhere, Power BI is about helping our customers embrace a data culture, where every employee can make better decisions based on data. The growth of Power BI has been staggering – customers ingest more than 20PB of data to Power BI every month, lighting up over 30M reports and dashboards, and the Power BI service processes over 12M queries per hour.

Part of that seasonal change in business is that computers and data systems will continue to increase in their influence of business decision makers.

But you don’t have to take our word for it. Gartner named Microsoft a Leader in the Magic Quadrant for Analytics and BI Platforms for 12 consecutive years.

Today we’re making significant new announcements that will help our customers driver a data culture.

….. A key enabler of data culture in organizations is the pervasive availability of standard, authoritative datasets that represent a single source of truth, allowing users to make decisions on trusted data, remix to create insights, all with unified governance.

While Power BI is no laughing matter for next generation entrepreneurs, applying data in a comprehensible manner to entrepreneurship is certainly advised for any ambitious business owner.

What is of greater importance for us is that when seeing these developing visualizations of data predictions, and the corresponding accuracy, we both see and understand that enterprise management is in a vibrant season of change. It will be fleeting moment, and the foliage will be past. Part of that seasonal change in business is that computers and data systems will continue to increase in their influence of business decision makers.

While Power BI is no laughing matter for next generation entrepreneurs, applying data in a comprehensible manner to entrepreneurship is certainly advised for any ambitious business owner. For the journeyman in business, we can begin with easier to develop key performance indicators, cash flow management and financial analysis.

So, if your looking for more from your business, ask yourself the following business self-assessment questions, for Accounting | Tax | Data. If you answer any question “NO”, then follow-up and ask yourself – “WHY NOT”? Document your answers concisely. Answering “no” is not necessarily wrong, you just need to understand the “why not.”

Accounting | Taxation | Data 

1. Does your executive team continuously collect, track and analyze key financial and operational data?
2. Does your business have a budget?
3. Does your business have three to five-year financial projections?
4. Does your business manage debt effectively?
5. Does your business meet annually with your banker?
6. Does your business have seasonal cash flow challenges?
7. Does your business have a line of credit for access when necessary?
8. Does your business monitor your equity to assets ratios?
9. Does your business regularly monitor and track working capital levels?
10. Does your business track and manage overhead cost variances and expectations?
11. Does your business calibrate costs of production or customer service at least annually?
12. Does your business have a travel policy?
13. Does your executive team track key performance indicators weekly?
14. Does your business plan strategic capital expenditures?
15. Does your business have target ranges for cash and working capital?
16. Does your business have meaningful conversations with your accountant each year?
17. Does your business consider tax filings to be relatively stress-free?
18. Does your business have a sales tax compliance plan?
19. Does your business maintain compliance with multi-state income taxes?
20. Does your business have a high level of confidence in your tax filings and income tax compliance?
21. Does your business invest in annual tax planning?
22. Does your business obtain quarterly or annual financial statements?
23. Does your business analyze all available data your customers needs and desires?
24. Does your business analyze data on the satisfaction levels of is products and services, to both current and historical customers?
25. Does your business monitor and track gross profit percentages?

Preface: “Strategy is the highest level of a plan” ― Fritz Shoemaker

Questions are the Strategic Runway Towards A Great Business

Credit: Donald J. Sauder, CPA | CVA

NOTHING succeeds in business books like the study of success. The current business-book boom was launched in 1982 by Tom Peters and Robert Waterman with “In Search of Excellence”. It has been kept going ever since by a succession of gurus and would-be gurus who promise to distil the essence of excellence into three (or five or seven) simple rules…….

It was only when they shifted their attention from how companies behave to how they think that they began to make sense of their voluminous material.

“The Three Rules ” is a self-conscious contribution to the genre; it even includes a bibliography of “success studies”. Michael Raynor and Mumtaz Ahmed work for a consultancy, Deloitte, that is determined to turn itself into more of a thought-leader and less a corporate plumber. They employ all the tricks of the success genre. They insist that their conclusions are “measurable and actionable”—guides to behaviour rather than analysis for its own sake.

They divide companies into three cutely named categories: “miracle worker”, “long runner” and “average Joe”. They even employ the cutest trick of all: the third rule is, “There are no other rules.”

The authors spent five years studying the behaviour of their 344 “exceptional companies”, only to come up at first with nothing. Every hunch led to a blind alley and every hypothesis to a dead end. It was only when they shifted their attention from how companies behave to how they think that they began to make sense of their voluminous material.

https://www.economist.com/business-books-quarterly/2013/07/13/where-thinking-is-king

Sometimes the best entrepreneurial lessons are not from business stories; to give an example of the power of thinking strategically, consider John 6: 3-9.

Then Jesus went up on a mountainside and sat down with his disciples.  The Jewish Passover Festival was near. When Jesus looked up and saw a great crowd coming toward him, he said to Philip, “Where shall we buy bread for these people to eat?”  He asked this only to test him, for he already had in mind what he was going to do. Philip answered him, “It would take more than half a year’s wages to buy enough bread for each one to have a bite!” Another of his disciples, Andrew, Simon Peter’s brother, spoke up,  “Here is a boy with five small barley loaves and two small fish, but how far will they go among so many?”

Do you know the rest of the story? Two questions, 1) Was the lad trained in strategic thinking 2) What was strategic foresight payoff that day? In addition, please carefully note the initial question.

Ask yourself the following business self-assessment questions, for the strategy and planning. If you answer any question “NO”, then follow-up and ask yourself – “WHY NOT”? Document your answers concisely.

Strategy | Planning

1. Does your business have three or more written values?
2. Does your business have a written purpose?
3. Does your business have a written vision or mission statement?
4. Does your business have a plan for key employee risks?
5. Does your business have written unique marketplace advantages?
6. Does your executive team review financials monthly?
7. Does your executive team have monthly or more frequent meetings?
8. Does your business have the real estate location to reach its long-term vision?
9. Does your business have a recognition in the community that aligns with its purpose and values?
10. Does your business seek advice from trusted advisors?
11. Are your businesses advisors and consultants trusted and effective?
12. Does your business have a plan to develop and groom its next-generation leaders?
13. Do your employees have confidence in your businesses executive team?
14. Does your executive and management team set and meet expectations quarterly or annually?
15. Does your businesses executive team invest at least one day per year analyzing historical performance and clarifying the future goal and mission?
16. Does your business contribute time or cash to the community that sustains its success?
17. Does your business have a succession plan?
18. Does your business have a buy | sell agreement?
19. When something isn’t working as expected in your business, does your management team invest the time to know why it isn’t working?
20. Does your business have an IT plan?

Preface: “I still keep asking these ‘how’ and ‘why’ questions. Occasionally, I find  an answer.” Stephen Hawkins. Genius cannot be that easy, right?

Questions are the Strategic Runway Towards A Great Business

Credit: Donald J. Sauder, CPA | CVA

Are you a businessman or a journeyman in business? Maybe neither? But, if you’ve asked that question, you are on the right path towards more effective management as either one. There is a difference. The entrepreneurial strategy that brought you to where you are in business today, if you are a journeyman in business, may not take you to where you want to be as a businessman. And yet that may not be a problem, because a journeyman in business can be as noble as being a businessman. The journeyman in business sometimes simply discovers benefits when managing their responsibility more effectively like a businessman.

Every business starts with a journeyman in business.

A journeyman in business takes deep risks, a businessman takes calculated risks, first, because he can afford it, and second, because he understands the winning is sometimes as easy as not losing. A businessman hires people who can help his enterprise grow, and he helps his team to grow along with it. A journeyman in business is focused on keeping up with the opportunities in the marketplace, and meeting project deadlines effectively.

A journeyman in business often doesn’t take the time to ask the questions that show they care about their organization, and at the root, the people who help them.

The journeyman in business finds fulfillment through excellent service and workmanship, while a businessman finds fulfillment through calculated expansion. A journeyman in business competes against the fierce competition, while a businessman observes the competition and works to keep the marketplace cooperative. Every business starts with a journeyman in business.

A journeyman in business often doesn’t take the time to ask the questions that show they care about their organization, and at the root, the people who help them. They enjoy and thrive on work. And that is a main reason their vision of an enterprise is sometimes held in check.

The following questions will help the journeyman pinpoint the depth of a lackluster business strategy, and provide a challenge to the businessman working towards an enterprise pinnacle.

If you answer any question “NO” then follow-up and ask yourself – “WHY NOT”?

The blink of the lights to that runway can begin with asking yourself the following business self-assessment questions. If you answer any question “NO”, then follow-up and ask yourself – “WHY NOT”? Document your answers concisely. There a several enterprise segments and we’ll begin with management.

 Executive Management

1. Does your executive team lead from example?
2. Does your executive team have the appropriate free-time to work on the business at least quarterly?
3. Does your business have adequate operational, financial, and employee risk safeguards?
4. Does your business have a clearly defined executive visionary and integrator?
5. Does your executive team have realistic expectations for growth and profitability?
6. Does your business have a strong relationship with a legal firm?
7. Does your management team regularly complete all tasks scheduled for completion each week?
8. Does your management team solve Company problems effectively?
9. Does your management team regularly discuss Company issues?
10. Do your management team strive to make management decisions that provide long-term solutions vs. short-term patches?
11. Do your management team value your teams character more important than team profits?
12. Does your management team deliver the field performance you expect?
13. Does your business have a cohesive and vetted management team?
14. Does your business have regular Company-wide meetings?
15. Does management reward and recognize Company employees for loyalty, 2^nd mile service, or continuous accountability?

Preface: Yes, we like lawyers, and if you’d like to know one reason why, research this quote.“I shall not rest until every German sees that it is a shameful thing to be a lawyer.”

Why Your CPA Advises You to Work with an Attorney When Necessary

Credit: Donald J. Sauder, CPA | CVA  (2015)

You are well advised to retain an attorney in certain instances. Why? Sometimes you don’t know what you don’t know. Your CPA appreciates this fact. After all, if you knew every tax and accounting angle, you wouldn’t need your CPA. When financial matters involve a peripheral individual or business, additional risks arise, and an attorney is worth the investment.

Often your CPA and attorney will work together to provide your business with a financial fortress. The fortress works like this.

If you need accurate financial statements, tax advice, resolution of an IRS matter, or numerical analysis, your CPA is the right resource. If you need to amend a partnership agreement, write a buy-sell agreement, incorporate a new business, or draft a letter of intent, you need an attorney. Remember this–if your CPA or attorney disagrees with this advice, you probably need a new CPA or attorney.

Often your CPA and attorney will work together to provide your business with a financial fortress. The fortress works like this. You wouldn’t pay a carpenter to install a new phone system in your business, nor would you pay marketing experts to install carpet in your new office. You understand the importance and value in working with a business or individual specializing in the task at hand. You would, perhaps, pay a human resource specialist to hire the right talent for a managerial role in your business. These are understandable examples of specialization. In too many instances, entrepreneurs have the wrong impression of what trusted advisors, such as their CPA, can do for their business.

Who forgot to take your name off the business credit card, or the at-the-limit-line of credit with your personal guarantee?

Suppose you are selling an interest in an LLC to your partner. You tell your accountant your plans, and he writes an agreement of sale document and amends the Operating Agreement. Your accountant makes the appropriate adjustments with the tax filing, and you receive payment. Here’s how things can go wrong.

Three years later you decide to contact the bank for a loan on investment real estate. Your banker says your credit score is too low, but when you checked five years ago it was stellar. The problem–the partner who bought your business interest has a delinquent credit card with a $35,000 balance.

Think of your attorney as saving you and your business from making major mistakes, not just getting you and your business out of major mistakes.

Who forgot to take your name off the business credit card, or the at-the-limit-line of credit with your personal guarantee? Don’t sweat a business attorney’s fees if you want savvy advice. It should be obvious why your CPA advises you to retain an attorney. They don’t want to pay the line of credit or credit cards from a malpractice lawsuit, and the professional oversight of an attorney provides additional financial protection to you and your CPA.

Think of your attorney as saving you and your business from making major mistakes, not just getting you and your business out of major mistakes. Listening to your CPA when they advise you to retain an attorney is in your best interest.

In summary, attorneys can save your business from legal hassles.   An attorney is an asset to your business, not a liability. Your CPA will likely give you a referral to a trusted attorney, should the need arise within your business.

Preface: “I never worry about action, only inaction” – Winston Churchill

Planning vs. Procrastination

Churchill might very well have been the “un-procrastinator”. Although he was plagued by doubts many times in his career, he never let such doubts interfere with the need to make a decision based upon the best available information. He made his share of mistakes, but he also realized that failure to make a decision is invariably the worst possible course…..click the link to continue reading.

Planning vs. Procrastination

Donald Feldman has worked with a wide range of companies in many different industries as an advisor with his business Keystone Business Transition, LLC. The KBT team works with a wide range of professionals, including leadership development specialists, employee stock ownership plan (ESOP) experts, qualified retirement plan and deferred compensation experts, merger and acquisition attorneys, and transaction intermediaries. These collaborations allow our advisors to develop a targeted transition plan that solves your unique challenges.

Preface: Kind words are like honey–sweet to the taste and good for your health. Proverbs 16:24 “Good New Translation”

I Can’t Believe He Just Wrote That

By Jacob M. Dietz, CPA

Preface: “Am I being careful enough with what I write to ensure that my implicit tone and meaning cannot be misunderstood?” Dr. Rob Skacel in Tailing Mulligan

Imagine Elmer’s business just entered the world of email. He and the team are excited about the whole new realm of opportunities and possibilities it opens to them. Now Elmer can document in writing what he wants others to do. It will be right there, in black and white. From now on, his team’s communication will be effective, clear, and mutually upbuilding. Right?

Although email does have some great capabilities, beware of the pitfalls that come with emails.

The Dumb Mistake

Elmer showed up at work Monday morning ready to fire off his first email. Elmer struggled with spelling, but he planned to rely on spell checker to get his emails right.

But that was 15 years ago when Elmer flunked his spelling tests consistently. He looked forward to typing emails that would automatically fix his spelling errors.

In school he dreaded spelling class. He received a 100% in spelling class one time. But it only lasted a minute. The teacher handed him the test, with a great big blue 100% splashed across the top and absolutely no red ink. Elmer was overjoyed. As he started to descend from cloud 9, he looked closer at the spelling test and realized the teacher mistakenly handed him the test of his cousin, Elam. Elmer pointed out the mistake. Dejectedly, he saw the red 60% on the test his teacher handed him with his name on it.

But that was 15 years ago when Elmer flunked his spelling tests consistently. He looked forward to typing emails that would automatically fix his spelling errors.

He needed a subcontractor to bring a dump truck to the jobsite that day, so he fired off an email to Eli, a subcontractor.

“hay eli I need your dumb truck today. Can you please drive it to the job down from your shop? Tanks elmer”

Spell checker showed no problems, and Elmer hit “send.”

Eli showed up for work that morning. While still rubbing sleep from his eyes, he saw the email from Elmer. Eli’s blood pressure rose when he read the email. “I can’t believe he just wrote that,” muttered Eli. Eli realized that his truck wasn’t the newest truck on the road, but he thought it could do a good job. It certainly wasn’t a dumb truck.

He quickly responded with his own email.

“Elmer, if you think that of my truck, then you can find someone else to help you. I prefer to work with contractors that appreciate me and my equipment.”

Elmer was confused. He liked Eli’s truck, and still hadn’t noticed that he inadvertently misspelled “dump” as “dumb.”

 Eli was taken aback. He thought Elmer was insulting him based on the email, but now, based on the nonverbal cues, Eli could tell Elmer liked him.

The Accidental Accusation

Elmer, while speaking on the phone with a customer, typed back.

“I do appreciate you liE. I don’t know why you think I don’t.

Eli was so frustrated, he decided to give up on email and walk the 500 feet down the road to Elmer’s shop. He opened the door to Elmer’s office. Immediately Elmer jumped up, smiled, stuck out his hand for a handshake, and said, “Hi Eli!”

Eli was taken aback. He thought Elmer was insulting him based on the email, but now, based on the nonverbal cues, Eli could tell Elmer liked him.

Eli asked why Elmer insulted his truck by calling it dumb. Elmer gasped “what do you mean? I never called your truck dumb!”

The Truth is Revealed

Eli told him to pull up the email. Elmer was dumbfounded when he found the word “dumb” in his email. I’m so sorry, he said, I meant to say “dump” truck.

Eli continued. “Then you had to accuse me of lying in your second email. I have never told you a lie for the 10 years we have known each other.”

Elmer was shocked when he pulled up the email. He now saw he had misspelled “Eli” as “liE.”

“Eli, I owe you an apology. Those misspellings were not what I intended to communicate. I was wondering if you could bring your dump truck to the job site. Thanks for stopping by this morning so we could hash out this miscommunication.”

Eli promptly forgave Elmer. The two shook hands, and later that day Eli’s dump truck was working away at the job site.

The Future of Communication

Eli and Elmer continue to use email to share information about jobs. They love the convenience of sending email and the ability to look back and see information that they would have forgotten if it had been delivered verbally. After the “dumb” truck email, however, they share a greater appreciation for the pitfalls of email. If an email seems insulting or unusual, they quickly meet face to face or call each other to find what is really intended.

Preface: Whatever your line of business services, to ensure your business is managed effectively, you need Bob Cratchit’s math skills to calculate your  costs accurately as frequently as every month.

Why Hourly Job Costing Analysis?

Donald J. Sauder, CPA | CVA   (2015)

Do know your hourly job costs? Maybe you need an Excel document from Bob Cratchit ? Costs count, and accurate hourly job costing is a easy component when analyzing if your business is making a profit on an hourly basis.

If you have a team of service technicians who service computer networks, how do you know how much to bid on a new server install or client network upgrade? How do you calculate what to charge per service hour? If one technician works on three projects in a day, how do you begin to calculate your cost for upgrading a hard drive, repairing a server power supply, and resolving malware concerns?

So when you calculate costs of your technician wages at $40 per hour, you can see that your true cost for your business per billable tech hour is closer to $114 per hour to upgrade the hard drive, repair the server power supply, and resolve malware concerns.

With thanks to Bob Cratchit, here is a simplified method to figure hourly costs for your projects. For example, your service technicians costs $40 per hour including employee benefits, employer taxes, and perks. If a hard drive upgrade takes 3 hours, your cost is $40 x 3 = $120 for labor. So what should you charge? Let’s say you have five technicians who work a combined 420 billable hours per month. Your cost for employee wages is approximately $1,600 per week (40 hours x $40 per hour), and $6,400 for the month ($1,600 x 4 = $6,400 per technician, per month). Overhead for the five technicians is $175,000 a year in rent, utilities, office supplies, advertising, office staff, and sales reps. Your fixed cost for the service technicians’ salaries plus overhead is approximately $575,000 per year. At 420 hours per month average your five technicians would work 5,040 hours a year. $575,000/5040 = $114 per hour of labor costs per hour to break even. For an 8% net profit margin, you should charge at least $123 per hour ($123 x 5040 = $619,920 of yearly sales).

So when you calculate costs of your technician wages at $40 per hour, you can see that your true cost for your business per billable tech hour is closer to $114 per hour to upgrade the hard drive, repair the server power supply, and resolve malware concerns.

If you didn’t accurately figure the cost of your operating expenses in the above example, and billed $95 per hour, your business would have a loss of $96,200 for the year based on the 5,040 billable hours. However, if you can optimize efficiency from you technicians and have only 4 technicians working 1,260 billable hours per year (vs. five technicians working 1,080 billable hours individually) you could decrease service wages $76,800, and decrease operating expenses and service wages to $482,200 per year to an average of $95 per hour.

Perhaps you have a good sales rep and have five efficient techs working 1,500 billable hours per year, which would be 7,500 billable hours yearly. With an overhead cost of $175,000 and technician wages of $384,000 your total costs of $575,000 would result in a cost of $77 per tech hour at 7,500 billable hours. So if you billed $95 per hour you would net $18 per technician hour, or $135,000 with five billable service technicians.

In summary, accurate costing is key to profitability in any service businesses be it plumbing, cleaning, electric, snow plowing or mowing yards. If you are unsure or need your confidence boosted when calculating cost, contact your trusted advisor.

Whatever your line of business services, to ensure your business team’s costs are managed effectively, you likely need Bob Cratchit’s math skills to calculate your updated hourly costs accurately as frequently as every month.

 

Preface: The Traction EOS Process™ provides a proven way to successful manage your business. The entrepreneurial operating systems (EOS) incorporates EOS Tools in the right order to best strengthen each key component of your business. One of those key tools is the Clarity Break. Try it. Scheduling your “vacation hour” monthly will likely be more challenging than you think. Read about it here….

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