Page 8 - Demo

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Roger and His Fabrication Shop
Chapter II: Labor Cap Helps Keep Your Business Profitable
Roger joined the Zoom call with Coach Rick, right at 10 am, a huge grin on his face.
“Good morning, Roger, what do you feel like expressing [WIFLE]?” Rick asked.
Roger remembered how odd and uncomfortable he had thought that question was when he had first started the on-going coach- ing program with Synchronous Solutions. How times had changed! Today he planning to start own leadership team meet- ings with a WIFLE.
“What I feel like expressing is, well, joy! We had another great month last month, the most prof- itable month yet again! Life is good, I am working less, stress- ing less, and yet...” Roger paused to gather his thoughts. “And yet I am feeling a bit anxious. Business is up, profits are up, and demand to add people is up, too. I guess I am worrying about growing too much and messing everything up.” Roger paused. “And that’s what I feel like expressing” he finally concluded.
“Thank you, Roger. What I feel like expressing is, I am grate- ful that you are now comfortable sharing what you are feeling. It really helps guide how I can help you navigate the growth of your business! And congratulations on yet another record month of prof- its! And that is what I feel like expressing!” was Rick’s response.
“Let’s jump right into it” con- tinued Rick. “You are feeling under pressure to add staff and are worried about growing too much and losing your profitability. Am I understanding this right?”
“Yes, the front office is starting to feel overworked and are ask- ing for help. Can I afford to hire additional people? Do I need to wait? How would I know? I guess I am just not comfortable with my numbers yet,” concluded Roger.
“Fair enough. Is adding a team member an investment or an expense?” was Rick’s follow-up question.
Roger paused. Rick always seemed to turn the their dialog
Rick Phelps
Synchronous Solutions
back on him with a question. At first this had annoyed Roger, but now he saw how the questions made him think and understand things better. He liked having to work it out himself, now.
“Alright, I know that on the Profit & Loss statement the new team member’s salary will show up as an Expense. So, it is an expense. However,” Roger con- tinued quickly, “I also remember when I refused to hire the CNC helper because I couldn’t afford the expense, that was a HUGE mistake. Hiring him was the start of turning my company around. Hiring him may well have been the smartest investment I have ever made!”
Rick cleared his throat. “After hiring Synchronous Solutions, of course!” Roger quickly added with a laugh.
“Exactly! Well expressed, Roger! Let me summarize the two issues that I believe might be driv- ing your unease. Number one: can you afford to hire an additional team member? Number two: is this the right place to invest in your business, at this time? Is there anything else driving your unease?” Rick asked.
“You actually described my angst very well!” Roger replied.
“Alright, let’s start with the first issue – can you afford to hire an additional team member at this time? Are you familiar with the concept of salary caps? It’s used in professional sports leagues like the NFL. Salary caps are used to keep the leagues competitive.”
“Well, I’ve heard of them, but don’t really follow sports all that closely,” Roger admitted. “How do salary caps work?”
“The sports leagues establish a maximum amount each team can pay their players every year. The idea is to keep the wealthier teams from always dominating through buying up all the best player’s contracts. Does it make sense that there might be a cap on how much you can afford to pay your team and still stay healthy and profit- able as a business?” asked Rick.
“Of course it does! If I spend too much on my team, or too much on the wrong players, I won’t be competitive.”
“Well said, Roger! So, you have a maximum amount you can afford to pay for labor, whether it is what Bob, your accoun- tant, refers to as Direct Labor, or Salary Labor, Overhead Labor, whatever. Labor is labor. It is time to show you a hidden part of your PCP tool, your Protective
Capacity Planner (PCP). Let me share my screen with you, but open up your copy so you can fol- low along.”
Rick pulled up Roger’s PCP spreadsheet and opened it to the PCP tab, scrolling down to the sec- tion labeled ‘$T & FINANCIAL GOALS.’ “There is a set of rows hidden in this section,” Rick explained, while he unhid them, “that help you understand your LABOR CAP. Up until now, we have talked about $OE, Operating Expense, as a single entity. Labor is such an important part of any business we want to be able to examine it separately from all the other elements that make up OE. Here you can see your $OE is split into two parts – $OE Labor and $OE Other,” Rick explained.
“Wait a minute,” Roger pro- tested. “This data has been hidden here all along?”
“Well, yes. We try not to over- whelm you with too much infor- mation, all at once. As it is, you have been drinking from a fire- hose of information this past year!”
“That’s for sure,” Roger agreed. “So you knew this would come up?”
“Roger, it is extremely common for businesses to grow their $OE too fast and damage their busi- ness, especially in the countertop industry. Again, it has its roots in the financial accounting system. Accounting tends to take what is fundamentally simple and makes it complex and confusing, leading to ‘justifications’ for buying labor or equipment difficult, and hon- estly, they are often total BS.”
“You mean like how it misled me on what my ‘most profitable’ products were?” Roger added.
“Exactly – more of the same. The accounting system just wasn’t designed to answer these questions!”
Rick showed Roger how he had added all the different Profit & Loss lines that had expenses asso- ciated with Labor, whether hourly or salary, and entered it into the now unhidden lines on the PCP spreadsheet. “$OE – Other is just $OE – TOTAL minus $OE – Labor.” Rick explained.
“We separate the two parts of $OE because, although we refer to $OE as being essentially ‘fixed costs,’ the reality is the OTHER part of $OE is more fixed than the LABOR part. You have to pay your rent, utility bills, loan pay- ments, and so on. You DON’T have to hire this office support labor, necessarily. It’s more of a choice.”
“That makes sense, I guess, but I don’t like the idea that Labor is expendable – we need the labor, and I don’t want to lay people off,” stated Roger.
“Of course, but we don’t want to get ourselves in the position of having more labor than one can afford, do we?”
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