management accounting Archives - Page 2 of 2 - TurnAround Social Sector Coaching

I live in a mixed income neighborhood. I was delighted when a new restaurant opened with a lounge style, creative tapas, and space for mingling. The staff were well dressed and professional. There was a waiter for every 3 tables! No more Joe the Bartender nights. It was worth twice the price 🙂   What a shock when Volcano suddenly closed its doors. I’m still in mourning,

BUT Business success balances quality against cost.

We all want to hire a lot of Grade A staff. Let’s assume that you own a restaurant. In this example, you hire only specialty chefs – pastry chef, sous chef, saute chef, fish chef, glacier, etc. Add professional waiters with 5 years previous experience. Just to be perfect, add a maître d’ to die for.

Would you get the Zagat Award?

No. In my neighborhood your restaurant will be bankrupt after 3 months. You cannot afford a staff team where everyone is a superstar and there’s too many staff anyway. You need a mix of employees at different levels and just the minimum number of staff.

Success in business requires a few Grade A staff, a few Grade B staff who are teachable, and constant firing of Grade B staff who won’t learn and also quickly fire Grade C staff who actually hurt your business.

A great business uses a Salary Cap. The Salary Cap is simply the total amount of money that you can spend on payroll. You can split the Salary Cap any way that you want. If the Salary Cap is $1 million, you can hire 10 people at $100,000 each or 20 people at $50,000 each.

The Salary Cap is easy to find. Start with your total revenue and subtract Fixed Costs (lease, taxes, mortgage, depreciation, interest, and insurance.) Now subtract all supplies and inventory purchases. If you own the business, subtract your return on investment.

The remainder is your Salary Cap. You can hire as many people as you want as long as the total salary is under the Cap. See how it works in this example.

Example:

Revenue: $5 million

Minus Fixed Costs: $1 million

Minus Inventory and Supplies: $1.5 million

Salary Cap = $2.5 million

Won’t people pay more for quality? Why not hire all the chefs in the first example and simply raise the price of every meal by $10. Your revenue goes up and so does the Salary Cap.

It depends on your market. If your business is in a high poverty area, people may enjoy very competent waiters at the restaurant and great food, but they will still eat at McDonalds. Your recipe for success may be to hire some Grade B- people and hire one good trainer and one good supervisor who can fire people regularly. The combination will give you enough Grade A staff to be a success.

I’ve always hated cooking. It takes so long and not easy either. You have to experiment with the recipe. Of course, people who like to cook get better and better at it. You have the same challenge with your company. The only way to get good at it is to experiment to find the right mix of staff. No one likes to fire people or move them around. It’s hard to find new people and train them. What a headache! Just like using recipes 🙂

Have patience. Keep practicing until you have the perfect recipe. Bon Appetit.

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We all look at our financials to determine how the company is performing. The problem with your financials is that they were invented in 1494 by Luca Pacioli (improving the Babylonian system of 5000 BC.

Would you not agree that an update is necessary?

The current financial system is oriented towards manufacturing. In 1995, service industry portion of high income economies was 66%. I can guarantee it’s grown since then.

Recording Labor as an Asset

There have been three economies in history – agricultural, industrial, and technological. Current financial accounting is dangerously biased towards an industrial economy that does not record the financial position of high income countries and their companies.

In high income countries, labor can now be divided into 3 parts.

  1. Unskilled labor where technology destroys labor. Dyson has a vacuum that takes pictures of the room and climbs over obstacles. Why do you need the cleaning lady? Technology has even destroyed sex work since people with similar desires can connect with each other voluntarily. While unions and civil service slow the disappearance of this sector, it is marginal.
  2. Skilled labor is the next to disappear. When did you go to the bank and find a teller? Did you check yourself out at Walmart or the grocery store? Self driving vehicles will replace all drivers.
  3. The sweet spot in a technological economy is talent. You cannot replace the creative, heuristic, critical talent. In a perfect world, we would see an explosion of the arts and frontiers of science.

In the current world, you will face a dearth of talent to hire and a million resumes from skilled and unskilled labor every time you post a job.

What to do?

  1. Expense all your skilled and unskilled labor as financial accounting requires.
  2. Conservatively estimate the revenue that each talent based employee adds to the company and the estimated length of service. Add that to long term assets.
  3. It will increase your assets and equity in most cases. If you are in trouble, it adds to your liabilities and shows that you are highly leveraged.

Next Steps

What do you do with assets? You increase their value and extend their useful life.

  1. Invest heavily in talent to increase their value. Add professional development as an asset instead of an expense
  2. Examine your labor pool and invest in Professional development to convert skilled labor into talent and assets
  3. Look for technology that replaces skilled and unskilled labor

Conclusion

We cannot solve the life problems of labor that is not needed. This is where government policy and philosophy steps in to guarantee an economic floor.

For the current moment, you need to add value to labor to turn it into an asset. You will find that employees are so thrilled that most will stay longer than your conservative estimates of an asset allowed. You will win. They will win. Your stakeholders will win. The best kind of scenario.

Meanwhile, your balance sheet reveals a true picture of your expense and assets as an organization. Are you ready for the current economy? Your new balance sheet will tell.

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A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.

 

Sources

“Growth in the Service Sector.” (n.d.): n. pag. World Bank. Web. 16 July 2016.

Management, Valuation, and Risk for Human Capital and Human Assets: Building the Foundation for a Multi-Disciplinary, Multi-Level Theory . Palgrave Macmillan. Kindle Edition. Russ, Meir. N.p.: n.p., n.d. Web.

 

Abstract

CEOs need to invest intentionally and annually in professional development for key staff in order to achieve the objectives of the Strategic Plan.

 

Adding a New Asset

Many nonprofits are service industry corporations with few fixed assets.*  That means the success of your company is the result of your wise use of two items:

  1. Assets (Cash and other Assets – Depreciation)
  2. Temporary Assets (Labor Costs and Materials Cost)

 

Meir Russ argues that you need to take your key managerial training expense out of the Income Statement (Expensed at a year or less) and make a supplemental Balance Sheet with a new category of Managerial Assets. So the success of your company is now the result of your wise use of three items:

  1. Assets (Cash and other Assets – Depreciation)
  2. Temporary Assets (Labor Costs and Materials Cost)
  3. Managerial Assets (Training and Professional Development Investment – Depreciation)

 

The rationale is that we invest in our key managers with the expectation that they will bring new skills to work everyday and that new productivity will last more than one year. This is not that novel an idea in other industries. Performers already look at life this way. They insure parts of their body with the expectation that its value will last more than one year. “As the Beatles sang “I wanna hold your hand”, their business managers were busy insuring their fingers for £200,000 – a colossal sum at the time…. More recently Bruce Springsteen’s voice was covered for $3 million.” (Hunter, 2003)

 

Let’s assume that your average key staff member has a job tenure of 5 years in your company. Create a supplemental Balance Sheet that records the professional development asset and depreciate the expense over that period of time instead of the normal pattern to expense it all in the year that it occurs.

 

The result is to showcase whether you leverage talent with training or are satisfied with the current state of affairs. If the new account has a balance of $0, I can predict the failure of your Strategic Plan.

 

Intentional Investment for Success

Your key players face the struggle to implement the Strategic Plan. If they don’t do it – what is your Plan B? The Strategic Plan, by definition, is not easy. Your key managers need to improve their skills to meet the challenge of tomorrow. Placing those expenses on the balance sheet gives attention to :

  1. What is a reasonable investment yearly in managerial development?
  2. Does that manager have an IDP (Individual Development Plan) and are they happy or resistant to work on it?
  3. Are some key players in danger of skill aging and need to get one more chance and discussion about moving forward or transition in the next year? One problem of strategic planning is a key manager can be valuable in one strategic advance and not really interested in the continuing journey.

 

Like anything else I write about, these conversations are about as pleasant as a trip to the dentist. But the CEO is solely responsible for the wise use of labor, materials, and assets to accomplish the Strategic Plan. Leveraging the value of your managers is arguably the most strategic action that you can take. Publicly reporting it will make sure it happens and it’s also a better way of looking at leading the company than Financial Accounting allows.

 

Increase Tenure of Key Managers

All of us have a dream of who we can be. I have met very few employees who really feel that they are in the perfect place. I can tell you that if you tell a key employee that you are willing to invest $5,000 every year in their professional development, you are guaranteed to extend their time in your agency. Your reports will feel appreciated and understood.

 

You can’t keep progressing on the Strategic Plan when key talent quits repeatedly. They take too much institutional history and culture with them.

 

Tell your board that you can keep a key staff member Ms. Gold 7 years instead of 5 years for $35,000 ($5,000 per year). Mention that you can implement a key objective of the Strategic Plan with the help Ms. Gold. If I could get that bargain, I’d give the extra $35,000 myself!

 

Conclusion

You are richer than you thought. Those managerial Professional Development Costs are not going to be used in one year. They are going to stay for year 2, and year 3, and year 4 ……..  They are one of your keys to complete the Strategic Plan.  You simply must treat them that way.

 

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A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.

 

 

 

*Hospitals and museums are examples of capital intensive nonprofits. The rationale of the managerial reclassifying of expenses should still be valid.

 

 

 

Hunter, Teresa. “What Price an Arm or a Leg?” The Telegraph. Telegraph Media Group, 29 Jan. 2003. Web. 07 June 2016.

 

Russ, Meir. Management, Valuation, and Risk for Human Capital and Human Assets Russ (2014-10-15). Management, Valuation, and Risk for Human Capital and Human Assets: Building the Foundation for a Multi-Disciplinary, Multi-Level Theory . 1st ed. New York City: Palgrave MacMillan, 2014. Print.

 

 

 

 

 

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Is it possible that your company needs stupidity protection more than a good audit? Audits (and the CPA function in general) are very good tools to prevent fraud and present a conservative picture of the organization. However, Management Accounting takes things one step further to protect against stupidity. Every company needs both protections.

My company has strong internal controls. It’s a challenge because we are spread out over several locations for both program and tuition collection. 12 managers charge expenses to the income statements for their departments. Over time, we have developed a careful manual of Financial Procedures, update it annually, use GAAP presentation, and work with the auditor to test for fraud.

It was a shock to see that none of this due diligence mattered when we made an investment greater than our resources. It has been two years to recover from that decision and the rescue is arriving from Management Accounting.

What is the difference between Management Accounting and Financial Accounting?

Financial accounting is standardized so that it is easier to compare several companies. Management Accounting slowly adds accounts to the Chart of Accounts and changes reports as your company changes. The results of Management Accounting give advice that is unique for your business at this moment. Because of that, we say that Management Accounting is future oriented, private advice for good decisions while Financial Accounting is historical, public fair presentation of the company. Both types of Accounting are required but Financial Accounting gets 90% of people’s attention.

Nonprofits need Management Accounting even more than For-Profits. For-profits have more access to cash and financing in the event of a stupid decision. They are more likely to own property that can be security for a bank loan. They may be able to issue stock or offer a bond issue. Nonprofits do not have these tools and it makes the need for financial advice about future decisions more acute.

What are examples of Management Accounting that nonprofits typically ignore? I’ll mention two of them.

Imputed costs – Assume that you receive a contract for student services for 100 students at $1,000 per student. Upon opening registration, you discover that 150 students want the service and you do not have additional funding. In financial accounting, you would debit income of $100,000, and debit expense for $80,000 for program and $20,000 for administration. Deliver an excellent program and you feel very successful under Financial Accounting.

Under Management Accounting, you have left the need for services and money of 50 students on the table.  The imputed cost this decision is the administrative portion of $10,000 (50 students * .20 * 50,000). With this change, the Income Statement for the program reports a $10,000 deficit under Management Accounting instead of being balanced under Financial Accounting.

Management has a decision to make after reading the Management Accounting report –

  • ask for more contract funding,
  • ask for fee for service for additional students,
  • ask for charitable donations, or
  • leave matters as they are.

Very few of us would have given this situation a 2nd glance under Financial Accounting.

 

Cash Flow Statement – In Financial Accounting, the Cash Flow Statement is still new and underused. One underused feature is to separate New Investment Projects from Continuing Operations Projects in the Chart of Accounts and New Fixed Assets for New Projects from New Fixed Assets for Continuing Program. Financial Accounting has no such interest in this separation.

Assume that 100 students are in your continuing program and you buy chairs, computers, and other fixed assets (charged to New Fixed Assets for Continuing Program) as they are destroyed each year. Over a period of 6 years you notice that you spend $50 per year per student.  Management Accounting then advises that you add $5,000 to the next capital budget for continuing operations Fixed Assets. That information could not be determined easily without creating separate Fixed Asset Accounts for Continuing Program. You now have advice on what level of Fixed Asset investment is required each year to maintain program at the quality and size you are operating.

You may feel overwhelmed by the number of ways that Management Accounting can probe and rearrange your data. It’s also true that some reports from Management Accounting provide no new insight. The point is that every agency should be doing some Management Accounting to spotlight decisions that will make a difference.

Most of us depend on Sheer Dumb Luck as we go from year to year with our companies. The audit is a reasonable attempt at fair reporting. Management Accounting is one more tool to bring some science and insight to decisions. My advice is to lead with assistance from both approaches.

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Somebody who reads this article needs cash today.

Without cash, you don’t have time to fund raise, to borrow, or to think. You can’t increase your services because you have no cash to advertise. You may even be profitable – but slow payers are strangling your cash.

You have one more source of cash – collecting cash that people owe to you.

 

Are You in the Banking Business by Accident?

Most of us allow government and clients to get our services and pay later. The bank calls that a no interest loan. Here’s an example.  Let’s say that your budget is $1 million and you offer job training where most of the expense is paid by the government. Clients pay for daycare for their kids while they take the training.

  • Assume that 90% of your cash is received after you provide and bill for your job training services and daycare. Assume that it takes another 2 months to actually get the money. Your financial report every month shows about $225,000 as the accounts receivable. Use this formula.  90% of your budget of $1,000,000 is paid late and you carry $225,000 (3 months) constantly in bills that people have not paid. You need that cash now for payroll and rent!
  • The formula is (90%*$1,000,000)/ (225,000)  = 4.
  • You are accidentally in the banking business! 90% of your customers slipped a no interest loan into the services you provided. That number 4 should be much higher or negative.
  • Divide the number of days in a year (365) by 4 and the answer shows that you wait 91 days on average to get paid. This can put you out of business! If you can reduce to 60 days to get paid, you have just added $75,000 to your bank balance!

 

How can you get your $75,000?

  • Discount for immediate payment. If you are paying 7% on a line of credit while you wait for your money, it makes more sense to offer a 5% discount for full payment. Cash will start coming in this week. We needed cash and offered a 5% discount for the tuition paid in full. To my amazement, one person came in and paid $19,000 immediately. We would have paid 7% on our line of credit.
  • Require a deposit. It raises your number 4 and reduces the amount of missing money. A deposit means you are collecting money before service is provided. Landlords always charge rent for the month ahead, the security deposit and the last month’s rent. They reverse the cash and are borrowing 90 days of cash from their tenants at no interest!
  • Require payment today for services today. You are no longer in the banking business. A simple model.
  • Develop a relationship with all the government agency secretaries. Learn the names of their kids and what they hope to do on vacation. They have power. One secretary took our claim and quietly moved it to the top of a big pile. Relationships make a difference!

 

Can you stop being the government’s bank?

Not 100%. But you will find with daily calls and emails, money will arrive much sooner than patiently waiting. And all of these ideas are simple enough to start today. Why are you waiting? Get your cash!

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A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.

Most Non Profits have little idea about the working capital to keep in the bank at all times. Nonprofit articles often recommend cash equal to 6 months of expenses. Those writers have obviously not actually worked in a smaller nonprofit. Aside from a legacy, there is little chance of putting aside half of the year’s program budget for a rainy day fund.

Many nonprofits take one of two approaches. One approach is to receive a windfall legacy or grant and keep the entire amount in a savings account to be safe. This sadly reduces the investment in mission. Imagine operating a food bank that can open a new location and get reimbursed for food. It will cost $1,000.000 to renovate the space. The Board decides not to proceed because it has $3 million available and fears drawing down its cash.

The other common approach is to put your head down, keep operating and hope that the day never comes when the unavoidable demand for cash clashes with the available bank balance.

Fortunately, there are formulas that help.

Greg Crabtree* advocates for 2 months of operations plus 10% profit of cash in bank. For example, a $12,000,000 revenue company might have $2,000,000 plus $1,200,000 ($3,200,000) in ready cash and securities.

On a daily basis that same company may only need $10,955 in constantly available cash and the rest in a money market (or line of credit).

Get out the calculator! The formula is  (2 * monthly amount needed to pay bills) / (Interest rate on line of credit/ 12).  Got that?  Now take the square root of that number.

Example: Your budget is $12 million** and your business is so regular that you need exactly 1/12 of that every month to pay bills. Line of credit is 5%

(2 * 1,000,000) / (.05 / 12) = 480,000,000.  The square root is $21,909.  The maximum to keep in the bank account is that amount and the average daily balance should only be $10,955. Save on line of credit costs or get more interest from the money market by holding only what the formula requires.

You can feed the hungry while making sure that your agency doesn’t end up needing bread.

*CRABTREE, GREG. SIMPLE NUMBERS, STRAIGHT TALK, BIG PROFITS!: 4 Keys to Unlock Your Business Potential. LIGHTNING SOURCE, 2014.

**My companies always have regular numbers to make clear examples. Don’t be surprised if you need to make some adjustments when you apply the formulas 🙂

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Whenever there is a deficit, we look at the budget for places to cut – less paper, less copies, less postage. The sad result is that you can’t mail anything for the next two months but the agency still fails. What can leaders do?

Non Profit Costs Are Labor Costs – Non profits all share a common feature – Most of their costs are labor costs. Non Profit budgets are made up of various human services. Those are provided by people that we pay. Non Profits are not selling postage stamps. You can cut the postage budget 100% and it still won’t solve a cash problem. 70% or more of a typical non profit budget is labor costs.

You won’t like this next part, but try one or more cost cuttings from this list.

  • Replace Low Quality Staff – Find staff who have been at the agency for a long time and have become mean and inflexible. They also tend to make better wages and benefits. Everyone is scared of them because they seem irreplaceable. Replace them. You will help staff morale and cut costs.

In one situation, the staff member was traded to four different managers because she was mean, was paid more than others, and played favorites. She informed one supervisor that she couldn’t be fired. The director felt like a lion tamer trying to get the job done. The result – the staff member left, income statement improved,  and the program never felt the loss.

  • Review Job Descriptions – Over time, job descriptions don’t change but regulations change, clients change, and technology changes. Carefully review jobs to see if you need to make significant changes and cut labor costs.

When you look around, everyone is busy. Ask each person for a list of their activities. Your goal is to find people who are being paid at a high level for a simple job that can be done at a lower cost.

A program director should not start stuffing envelopes after they have extra hours when their program funding and clients are cut. The task is needed, but not at that labor pay rate. Perhaps that director can add on another program to direct and save the cost of a 2nd position.

For example, our agency built an Excel report weekly for the bank deposit. Changing the accounting system removed that step which saved 4 hours of labor per week and audit costs at the end of the year.  Sadly, this was not apparent – and the accountant started to stuff and address invoice envelopes to fill the time.

 

  • Capture Lost Minutes – Are you paying for 4 minutes for a staff who arrives 2 minutes late every day and also leaves two minutes early? If you buy a time clock with biometrics, and pay only for the actual time for 60 staff who cut those corners, – its $1,000 a month that you can cut from labor costs.

 

  • Leverage Technology – Finally, are you using technology to reduce labor costs? Banks are using ATMs instead of tellers. Grocery stores are converting to self checkout. Non profits have two areas where technology helps.

Use technology on agency activities not related to your direct program services. Start bill paying online with controls, start payroll and tax reporting, human resource documents, etc. The annual cost of the change is cheaper than the annual cost of a staff member to perform these jobs.

Also, look for ways to assist appropriate direct program services with technology. In one program, each staff member was given an ipad. The observations were made and stored directly so that no clerk was involved to maintain paper files. The new system also allowed easy review of previous reports. One staff position was cut from the budget.

 

Conclusion:

The reason we don’t cut costs is that it’s easier to take $100 out of the postage budget than to release someone from the staff. Leading an agency has difficult moments.  We got into these positions to help the group of people within our mission with special services that will change their lives. When the budget to do that program is in danger, it’s the top and difficult priority of leadership to protect them.

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A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.