Here’s the one you’ve been waiting for.

Over the last couple of months a recurring theme has surfaced here at the Management Strategies desk. It started in December with “Firing Made Simple” and continued last month when tactics for making everything in the people-management realm easier were discussed.

But what about dollars and cents? Profit and loss? Mucho dinero y nada? Is there an easy way to figure out how much money you’re actually making and what you need to change if you want to make more?

There is a way, of course. It’s cost accounting, and longtime readers already know it, in both name and practice. But its mere mention glazes the eyes and prompts the question, “Why bother?” in others.

These folks complain that cost accounting is anything but easy and takes too much effort for too little return. “Spending dollars to chase nickels,” a shop owner once told me. (Between you and me, I think he secretly feared that he’d go to bed a woodworker one night and wake up an accountant the next morning. Pretty scary when you think about it!)

But costing, as it is also known, doesn’t have to be difficult. In fact, starting is simple; the hardest thing about it is knowing when to stop. So if you’re one of these holdouts, this is the Management Strategies column you’ve been waiting for.

Long before I ever designed my first spreadsheet, I was keeping track of the time I spent working on each job. Hopefully, you are, too. I was also, without even thinking about it, amassing a record of the materials used on each job and their costs: vendor invoices.

My “light bulb moment” came one day at the end of a job when I decided to figure out — based on time spent, materials purchased and selling price — just how much money I’d made. Not how much I’d paid myself for labor, but how much was left after that amount and all other bills were settled.

Though the exact numbers escape me now, I do remember two things: (1) the job was profitable, and (2) it was not as profitable as I’d have liked. Figuring this out took all of 10 minutes.

Like it or not, costing is your best guarantee of future profitability. But rather than not liking it, give it a try. I think you will be surprised to learn how interesting and informative cost accounting can be.

Spoken like a true accountant, I know. But not only am I no accountant, I might very well be the furthest thing from a mathematician on earth. As I mentioned in the series “Destination Profitability” in 2001, I’m a victim of a sordid little experiment which educators of the day bravely dubbed “the New Math.” My hate-hate relationship with all things numeric began in the fourth grade and scarred me for life.

Not until I began working with a tape measure every day did I come not only to understand but really appreciate math for what it is: a tool. Whether your aversion to costing has similar roots or different grounds entirely, know this: Failing to analyze jobs means you actually don’t know what you’re doing as a businessperson, regardless of your woodworking expertise.

Unless this is a hobby to you — no disrespect to hobbyists intended — always remember that there are great woodworkers everywhere who don’t make the money they want to because they don’t know the first thing about how to do it. Cost accounting is that first thing.

So, rather than wait for forces other than costing to improve your bottom line — divine intervention, photosynthesis, whatever — take 10 minutes yourself to analyze a finished job. Here’s your ultra-simplified, abridged, condensed guide:

• STEP ONE: Total up the labor and material costs and subtract that from your selling price. Hopefully, you’ll be feeling pretty good.

If not, think about what went wrong. Think about where your selling price came from. If you don’t know, that’s a problem.

If you do know how you got your price and you overspent on materials, that’s a problem, too. Same holds if your labor estimate was off. Suddenly, you’ve identified areas that need improvement, with some simple addition and subtraction.

Let’s assume your analysis shows you made money and you’re feeling okay. Great! But depending on your circumstances, you may not be done.

Do you pay rent, have a business loan, electric bill, phone service, trash removal, insurance, advertising and vehicle costs? You need to take these things into account, and it is here that many folks take costing to one extreme or the other, chasing nickels or quitting outright. Instead, keep it simple with...

• STEP TWO: Total up all such costs over the past month and divide by the number of hours worked in the shop only during the month. Estimate if necessary; as long as you’re careful about including all these other costs, you’ll be close enough.

Take the result and multiply it by the number of hours worked on the single job you’re analyzing. Add that to your labor and materials total, and subtract this sum from your selling price again. Are you still feeling good? If not, you’ve identified another area ripe for improvement: You need to cover your overhead when you price work. And on top of that, make a profit.

That’s really all there is to costing. It’s about making sure you’re making money and changing the things that keep you from doing so. The key is starting. When you do, I promise, you’ll kick yourself for not doing it sooner. If a New Math casualty like me can do it, anybody can.

Note: For readers seeking a more detailed guide to shop profitability, visit the Management Strategies archive at www.iswonline.com and read Tony’s series “Destination Profitability” beginning in February 2001.

‘Ask Tony’

Incentive Programs

Tony,
I have a cabinet shop with about 20 employees and have never implemented a discipline program for things like tardiness and unexcused absences. After reading your recent articles, “Firing Made Simple” and “Everything Made Simple,” we plan to do so.

I have considered a program that I would call “30 Days Equals $40,” where we reward hourly employees for doing what they are supposed to do anyway: Get to work on time every day, and check in and out of breaks and lunch on time. If they do that for one month, uninterrupted for any reason, we reward them.

We will also discipline for tardiness. I am thinking that we would make employees work through break if tardy more than once and dock an employee’s pay $.50 per hour if late five times, with possible termination for more than 10 latenesses. These would be over a year’s time. What do you think?

This program does not address installers who are in and out and not seen all day, nor salaried employees. Any thoughts on these?

Tom
(Company name withheld)

Tom,

I like your “30 Days Equals $40” plan for hourly workers. I know many owners feel that you shouldn’t “incentivize” behaviors which are expected as part of the job, and I tend to agree. But this program provides an incentive for consistent attendance while clearly establishing that unexcused absences and chronic tardiness will not be tolerated.

Of course, before you institute any incentive program, be sure that every conceivable contingency is addressed. That may seem obvious, but you would be surprised how often half-baked programs are put into place, with the end effect being the opposite of that for which they were conceived. Rather than engendering good feelings about the jobs people do and recognizing them, poorly planned incentives can leave employees feeling like the company is not upholding its end of the bargain or is moving the goalposts.

For example, you say that the 30 days of timely clock-ins and clock-outs must be uninterrupted for any reason. What about a doctor’s appointment? A legitimate (i.e., properly called in) sick day? Childbirth? Do any of these put a person out of the running for that period? If so, when do you begin counting again? If not, what are the specific requirements?

I’m not trying to discourage you or anyone else from doing incentives, just illustrating the importance of thinking them all the way through and making the ground rules clear. Beyond sitting down with your production supervisor, consider involving the employees themselves. Let them know what you’re thinking about and ask for their help in troubleshooting it. This not only helps them understand that your heart is in the right place and that you have good business reasons for the incentive, it also gets them to “buy in.”

Having input before the fact will even prompt some employees to see the bigger picture and get beyond themselves a little. Knowing which employees are willing and able to do that, as your company grows, is certainly a good thing. For installers, you’ll need to look at other options.

If you do a lot of residential work, consider a questionnaire that asks customers to rate your installers’ performance. Your install crew should give it to (or leave it for) the homeowner when the job is finished and they are ready to drive away. Then follow up with the customer yourself to confirm their comments.

Use positive customer feedback to reinforce your installers’ good work and as a basis for rewards. Use negative input to shape your crew(s) into the customer-driven company representatives you want them to be. Just be sure you’ve personally confirmed all comments with customers — positive and negative — before acting on them.

If your installers work a lot on commercial jobs, you will need a more structured installation-management mechanism, but “structured” doesn’t have to mean complex or costly. A simple program of unannounced visits to job sites to check on your people, their progress — and maybe to ask the site super about their performance and interactions with other trades on the job — will do the trick. (Of course, there’s no reason not to visit residential projects on the spur of the moment as well.)

For salaried employees, I suggest sticking to bonuses at holiday time, coupled with spontaneous ones for work that is consistently excellent, effort above and beyond the call of duty, or ideas that make everyone’s life easier.

Finally, avoid incentivizing people to the point that they only take initiative for material reward. Remember instead (paraphrasing Robert Townsend, my all-time favorite management guru) to use what just might be our most-neglected form of compensation: the words “Thank you.”

Good Use for Scrap

Dear Tony,

I recently read with much interest your article in CWB where a gentleman was asking for advice on how to rid his shop floor of scrap heaps of board and unused jigs.

Teaching the WoodLINKS Cabinetry program here at Theodore Roosevelt High School in Kent, OH, I have partnered with local wood manufacturing industries that donate such scrap materials (those that are useable, of course) to us for student use in their personal projects.
In return, our school extends back to the company a tax write-off for their donation. I merely ask the donating party to place a value on it and to document the amount to our board.

The company wins by getting rid of semi-useable “scrap” and by getting tax write-offs; the school wins by partnering with industry in the community; the students win by having high-quality materials to work and learn with; the parents win by not having to pay a premium for materials for student projects, and ALL win by learning what each other does and how they operate!

Troy Spear
Kent, OH

Troy,
Thanks for sharing your win-win-win-win-win solution!

Anthony Noel has written for the magazine since 1994. Send e-mail to [email protected]. If your question is for “Ask Tony,” please put “Ask Tony” in the subject line. Even if your question is not used in the magazine, Tony will do his best to respond personally via e-mail. Because CWB reaches the desks of company owners and managers, we gladly preserve questioners’ anonymity upon request.