Category: small business

Providing Services under Covid-19

~ C.O.R.E. Beliefs by John ~ Leave a comment

It has been awhile since I have written here – mostly because I blog at www.core-acct.com/core-beliefs.   There we share lots of ideas on how condominiums can successfully run regardless of what pressure the rest of the world is under.

Today I thought I would share how we are responding on behalf of our clients.  Most of these items we have had in place for at least 6 months and were beginning to roll out to our clients.

  • zoho meeting and webinar.  The webinar approach allows us to have the board act as co-presenters and the condo owners to log in and watch the proceedings.
  • Board briefing books.  An e-book sent to the board about a week to 10 days in advance of the board meeting with all the information they will need to have for the agenda.  This includes the financial statements, committee reports, management reports and suggested motions.
  • E-Voucher system for bill payment.  Some of our association still require a board officer (the treasurer) to counter-sign checks.  Our e-voucher system automatically sends an email to the required board officers to review the documents and then e-sign their approval.  This allows us to then either pay by ACH or check without requiring a business officer to find time to meet with us.
  • Service request system.  Unit owners can go online and report an issue and our system automatically logs it and starts a workflow which takes us all the way through vendor billing.  This includes getting all necessary approvals from our team as well as the board.
  • Our HOA Fiscal system to manage assessments and owner payments.  We designed it to allocate the assessments in accordance with the CC&R’s and ensure that owner payments are easily tracked and recorded against the correct assessment.

The team tracks everything in our database.  And yes, we spent a great deal of time and energy on customizing our CRM system to work this way – but it is so worth it.  Our emails are automatically recorded as well, eliminating the need for any of us to CC another team member.  We record phone calls and can even receive text messages.  All this means that the account manager has everything at his or her fingertips they might need to know what is going on with their assigned client – which leads to more effective and timely decisions.

And we think the best part is that this is at no additional cost to our clients.  By eliminating the non-value added time wasters we can leverage our time more effectively which means more work in the same amount of time per month.  We win – we can work from home and reduce travel time: Clients win – they get superior service with no additional cost.  They can talk to any of us and know that it will be taken care of.

In short, peace of mind for the boards.  They see everything they want to see in order to make the best decision for their association and they know we are on top of everything that is going on.  And all at no additional cost to their association.

If you are a service business and are still trying to meet with clients physically and sending emails to everyone in your organization to try and find a document, perhaps you need to re-evaluate your process.  Consider:

  • Moving away from landlines to virtual phone systems which can tie into your CRM
  • Ensuring you have a project/client work management system which allows you to track the steps your team needs to take and also where you are in the process.
  • Set up a record management system where the team (and maybe even clients) can upload documents so that they are in one place.  Move away from unmanaged record storage on your local or even network drive.  Save it to the database!
  • License Zoom, Gotomeeting, zoho meeting (plug, we use zoho) or some other meeting software which allows you to set up both group meetings, classes, or on-demand one-on-one meetings.  Even within your office, it is superior as you can share documents, jointly change the document, and share screens without having to get out of your chair.  Efficient use of time.
  • Stop sending emails.  License Slack, use Teams, Yammer or the like to let people share ideas in a social way.  Zoho and RingCentral (plug, our phone system) both offer means for us to share documents outside of the database as well as simply have a free exchange outside of email.
  • And lots more.  Everything you are currently doing that takes more than one person to do should be in some sort of workflow/document management system.  Period.  If you don’t want to license something industry specific, use Access and interface with Sharepoint (if you are using Microsoft 365).  Anything but the constant extra work that your current process requires that slows down your ability to respond to clients and keeps you from scaling without extra costs.

Welcome to the new normal.  Take the time to plan and fix one area of your business at a time and you will soon be ready for whatever the future offers you.

 

Understanding cost drivers

~ C.O.R.E. Beliefs by John ~ Leave a comment

A few years back, I was brought in by the president of a small business which manufactured and installed custom storage systems for offices and restaurants.  His concern was that either his accounting system had a bug in it or that someone was stealing from him.

This came to light when he ran his most recent quarter profit and loss; it seems that for the first time in over 7 years, he lost money.  His shop has never been busier.  He is getting lots of highly profitable contracts so the quarterly results don’t make any sense.  I asked to see quarterly information and got to work.

The first report I reviewed was the profit and loss report.  Sure enough, there was a $53K unabsorbed overhead amount  This happens in one of two ways – quarterly overhead went through the roof or the driver, in this case direct labor hours, were substantially lower.  Sure enough, the direct labor hours were down about 10%, indicating that labor wasn’t recorded.  Which would be really strange as the controller had been doing this job for almost 5 years and consistently made the overhead allocation adjustment correctly.

overhead1

So I asked the president if there were any major changes.  His response was that he decided to outsource all of his installations.  As a test, he explained,  the company in the prior quarter elected to put the installation out to bid on one project and the price came in at about 60% of what his costs were.  So he decided that he was going to “sell” the installation department to his department supervisor who would then quote jobs as an independent contractor.

I explained to him that what he was seeing was a direct result of the decision to outsource without knowing all the available facts.

Fact: There were two different departments, each with its own overhead costs and driver

Fact: the Company was using a single driver addressing the total overhead

Conclusion: The same (essentially) overhead dollars were being allocated over fewer direct labor hours, leading to larger unabsorbed overhead since the rate was not adjusted to reflect that fewer hours were being “sold”.

I then showed him a spreadsheet of what this actually looked like:

overhead2.png

The company rate of $41 was correct, but only for its overall purpose, allocating company overhead to production costs.  In reality, very little of the overhead went to support the installation department.  As a matter of fact, when separated, it became obvious to him that the shop was being subsidized by the installation department.

When they bid a job and included the rate of $41 to the install hours, the company was in fact generating an additional $27 in revenue which went to the bottom line.  But this was hidden from the controller, the president and the estimating department.  Thus, the $100 per hour revenue rate appeared high when compared to the $75 rate that the subcontractor offered.

In truth, had the company been facing lost estimates, they could have reduced the hourly rate for installations from $100 to about $65 and still earned a decent profit.  But you have to look deeper into your company structure in order to understand that options like that are available to you.

When most of your costs are fixed, then basing make or buy decisions on your overhead absorption rate can be dangerous.  The key is understanding that allocating costs by way of hours turns that fixed cost into an illusory variable cost.  You begin to think that by eliminating the driver, the cost goes away as well.  It doesn’t work.

Once the president understood this, he was able to convince the installation team to rejoin the company, although he did have to make some concessions as to bonuses when it came to profit earned on installation jobs.  And with this information, the company went through the various areas of the business and examined how costs were incurred and allocated to projects to even more effectively estimate contracts and keep their bids competitive while improving their profitability.

 

The power of analysis

~ C.O.R.E. Beliefs by John ~ Leave a comment

Do you have a checklist for your month end closing process?  Have you added running analytical testing to your checklist?

Managing multiple association accounting systems does not leave a lot of time to thoroughly review everything, which is, of course, why we created our checklist in the first place.  I can determine what has been completed and by whom and then spot check their work.  It also helps that we have solid systems to fully vet transactions as they are incurred and which work hard to detect and prevent fraud – but still, the goal is to provide full information for the month and year-to-date so we struggle with determining what might be missing.

First, look at some relationships between your balance sheet and your statement of operations.  Certain accounts have very comfortable relationships – think inventory and cost of goods sold while others may be more tenuous.  Also, keep in mind that the purpose is to help you determine if the statements appear reasonable; so don’t overdo the number of calculations.

Some key ratios you should consider running at month end to help you pinpoint potential problems:

Days in Accounts Receivable

This will give you a sense of potential collection problems without having to dig into the aging: Take your monthly revenue and divide by 30, this is daily sales.  Then divide this amount into your accounts receivable balance.  Now, the two most important questions you should ask yourself: Is it over 30 days?  Is it higher than prior periods?  If it is more than 30 days, you have sales from prior months which have still not been collected and if it is increasing, then you have many sales which are not being collected and you might need to consider increasing your allowance for potential bad debt.

Days in Inventory

This will give a good idea if inventory is being handled well without worrying about a potential physical count of inventory.  Take your cost of goods sold and divide by 30, which is the daily cost of sales and then divide this amount into inventory.  Is the pattern consistent with prior months?  Did you see an unexplained change that skewed the results well beyond prior months?  A large increase could indicate that some CoGS were not adjusted properly or that potentially you have inventory which is not turning over, potentially indicating obsolescence.

Sales Growth Rate to change in A/R

Comparing the growth in sales to the change in accounts receivable can also provide an indication of deteriorating a/r quality.  If your sales increased by 5% from the prior months but your accounts receivable increased by 25%, it could indicate that collection problems might exist.

Gross Profit Percentage Month Over Month

If your company sells products, this could help you address a change in your business or in customer demand – either of which could indicate other potential problems.  You will want to map out your gross profit percentage – which is revenues less cost of goods sold and divided by revenues – for each month over the past few years.  First, compare it to the past few months, is the trend consistent?  Then compare it to the same month in prior years.  If you are trending downwards both over time and in comparison to the same period in prior years, this could indicate possible issues with the costs of materials or production issues, both of which can have long-term impacts to your business.

Labor Costs to Revenues

One area where a small business can be caught off-guard is in labor costs.  Unplanned overtime can be especially painful so always watch to ensure that overtime is planned and paid for, either in revenue premiums or in additional sales.  If labor is consistently increasing during months of slow or no sales growth, perhaps your overtime policy needs to be re-evaluated to ensure that it is not out of control.graph hr rev to ave

In this example, taken from a client who was experiencing reduced profits, we were able to identify the driver was in fact over 1,400 overtime hours.  There were two primary drivers of this, first was that department managers did not actively plan work for the week, leaving things to be completed on Wednesday and Thursday so they could be shipped on Friday.  Since there was always a lot of work to complete, the teams were working 2-3 extra hours on those two days, even if Monday and Tuesday had the teams with substantial idle time.  Second was that there was no policy to require the manage to authorize the use of overtime in advance.

Analytics can help you understand how your business operates.  It can point out areas where additional effort might be called for and also help management isolate and test potential issues to see if a change can help improve performance.

 

 

Supplementing Your Accounting System

~ C.O.R.E. Beliefs by John ~ Leave a comment

At a meeting last week, I was asked what software we recommend for accounting.  The owners runs a small business, fewer than 10 employees and sales in about a dozen states.  They are currently using QuickBooks but it doesn’t track everything they want easily, especially their inventory which is often stored in multiple locations.

I suggested keeping QB but supplementing it.  “With Excel?” one of the owners asked.  No, I replied, with Access.

I am a big fan of doing work, especially accounting work, in database systems.  This isn’t to say that spreadsheet’s don’t have a place, they do, but in a lot of cases, a well structured database enables a company to run complementary systems with minimal investment or complexity.

For example, we use Access to manage the complex owner payments for a condominium project we are managing.  The system automatically generated the assessments to each owner and we can receive payment and split the payment up much easier than in Excel.  Plus, we created a series of sub-tables which allow us to set up and create daily ACH files to upload to the processing system.  In the 3 months we have been using the Access system, we have cut our time to record and reconcile deposits about 90%.  And we know so much more about who, when and how owners pay their assessments than you could ever get out of Excel or even QB.

We set up the deposit form with a series of check boxes which allow us to manage payments to the special assessments – and allocate interest to the payments – as well as flagging us to record the deposit in QB.  Every week, I can run a specific query which searches the deposits table for unrecorded deposits and create a matrix table showing me how much to record as a deposit in QB to each owner receivable GL account as well as the amounts which were deposited to the various bank accounts.

We can track significant detail for each owner, including multiple emails and phone numbers as well as setting which method the owner prefers their information.  And, because we know how important it is to know when one owner’s responsibility ends and another’s begins, we created a specific process to track unit sales and split the transaction up to help both the buyer and seller know when and how much they owe at time of closing.

And the best part is, when we need something kicked out to Excel, we can create a routine which gathers the information in a query and automatically creates an Excel workbook.  Doug used this feature to help with the budgeting process to ensure that the allocation percentages were accurate without having to rekey data for each of the various scenarios.  And, once the budget was approved, we could reimport the Excel file to create the new year’s assessment charges for the Owners statements.

Excel is great.  We use it extensively, especially for financial statements and analysis.  But when you need to control data entry and you want to ensure only approved data are used, I strongly suggest you consider Access, or any other database application you like, as it is superior than Excel for multi-user and data management.