Some recent, not-minced words with readers.
Readers send me lots of e-mail, often asking my advice. I try to keep my answers measured and instructive, but time constraints — or outright impatience — sometimes forces me to be more direct.
One recent letter came on the heels of last year’s series about building a cost accounting spreadsheet, from a guy I’ll call Butch.
“I have completed the spreadsheet and everything came out fine until I got to the cost of overhead. I did the Overhead Calculation Form (OCF) and got $25/hour for an overhead rate. That makes this countertop a $149.31 loss,” he says.
“I may have made an error on the OCF,” he continues, “but can’t see anything wrong. Any suggestions?”
I got this note on my way to vacation. In a hurry, I asked Butch to send me his OCF. By the time I got to the airport, it had arrived. Though error-free, it told a sorry tale. I quickly responded:
“After reviewing your OCF, I have a pretty good idea of where the problem lies; maybe you do, too. Shoot me an e-mail with your thoughts and I’ll reply when I’m back.”
Almost half the expenses on Butch’s OCF were payments to three or four credit cards. His big issue was debt, and when I got home, his reply showed that he knew it:
“Too much debt!,” he wrote. “I am working to pay this down ASAP. Some of the numbers you saw on the OCF have changed for the better, but I still have debt.
“Cash flow is always an issue!,” he went on. “I try to time draws to expenditures. I typically ask for a deposit, two draws and a final payment after installation.”
And finally, “Speed of production. My estimates are becoming more realistic, but jobs seem to bog down. I don’t know if people are spread too thin on too many jobs or I’m not communicating expectations. We do high-end work, so our clients expect excellent quality.”
Facing the usual post-vacation game of catchup, my own time issues weren’t much better than Butch’s. Twenty minutes later, I fired off this reply:
“You are correct, debt is your #1 issue. While you are trying to pay it down (pay it off, I hope!), you aren’t — at least not at the prices you are now charging.
“The beauty (some say the curse) of the spreadsheet is that it is impartial, unemotional. If we forget everything else for a moment, the simple fact is that you can’t survive if you don’t turn a profit. So paying off that credit card debt is your top priority, and a close second is never borrowing against credit cards to finance your business.
“If cash flow is an issue, I’ll bet it became one on the day you decided you could take money from a current job to settle the costs of a prior one. Doing that is another signal that you are not charging enough for your work. If you were, there would be no need to ‘rob Peter to pay Paul.’
“Similarly, speed of production often, but not always, points to pricing issues. If jobs are consistently taking longer than you expect, you are not estimating the labor correctly and won’t make enough to cover the actual hours.
“One mistake you made on the counter job in question was putting a $20/hour guy on it. You said your estimates are becoming more realistic, but you can’t afford to wait for them to ‘become’ more realistic, because every losing job snowballs your debt.
“If you feel you could be communicating better with your staff, you are probably right. That said, you can also incentivize your workers by telling them how many hours a job is supposed to take and bonusing them if they do it in less time.
“But remember, your projections must be based on reality. If you give employees targets that are unreachable, they will lose two things: their respect for you and quite possibly some fingers.
“You also may have production bottlenecks, but the only way to know is by spending time on the floor. Are you doing that on a consistent basis?
“Your clients may expect high quality, but they should also expect to pay for it. Right now, you are paying for their projects. The sooner you start thinking that way, the more determined you will be about making money.
“You are probably worried that you won’t get as many jobs if you raise your prices. You are right. You will only get profitable ones, which is fine, because the losers are killing you anyway.
“Right now, you are on the road to failure. You need to increase your prices immediately, do costing on every job to make sure you are profitable all the time and apply the lessons that costing teaches you to your estimating process. Then you can confidently sell your quality, not your price. Until you do this consistently, you will lose money consistently.”
In closing, I laid down the gauntlet, in hopes Butch would take it up:
“Running a business is a lot of hard work. How badly do you want to succeed?”
Butch took the challenge, saying:
“Thanks for your candid reply. I have robbed Peter to pay Paul. We do take too long, but most of all I do not know all my costs, which developing and using the spreadsheet over the last few months has helped.
“You asked how badly I want this business. This is the only means of support I have. It cannot fail. I cannot let it fail.”
A Second Note
Another reader recently wrote:
“I have a woodworking shop specializing in low-priced, very high-end kitchens in New York City and the situation right now is such that I have no work at all, first time ever, and I may be compelled to close my business. I also sell very inexpensive Chinese kitchens.
“Is there a location somewhere in the United States that has a hungry market for my products during the present turmoil? I would relocate right away, anywhere.”
My brief reply:
“If you are selling high-end at low prices, that pretty much sums it up: You are selling price, not quality, so you are selling to price shoppers rather than quality shoppers. If you can’t find people willing to buy quality in NYC, you are certainly not going to find them in Dubuque.
“Whenever the economy goes to hell, the first thing price shoppers do is stop buying things, and that is why you have no work.
“You need to change your field of attack. Look for people who put quality and function above price — and I daresay, mark everything up. White Plains. Central Park West. Do you get my drift?”
I never heard back from that reader, but that doesn’t change my feelings.
Keep those letters coming, folks!
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