Archive for April, 2009

The Remodeler’s Ponzi scheme!

You might not think the phrase “Ponzi Scheme” applies to your remodeling company – think again!

The March 23rd issue of the New Yorker magazine has an interesting article about Ponzi schemes entitled “Madoff and his Models” in which the author discusses 2 historic schemers who turned up client’s up-front money into personal cash.  Towards the end of the article he says:

“At some point the incoming money cannot keep pace withth eoutgoing claims, and the fraud must unravel.”

In a related article from the March 2008 issue of Fortune – Small Business entitled “Do the Math” author Jay Goltz says:

“My friend was running something like a Ponzi scheme, except that he was conning himself instead of clients.”

In this case the friend who sells large computer systems booked his deposits on the sale as income rather than deposits.  Therefore he thought he had a LOT MORE income over the past few years than he truly had.

“For years the books said he was profitable, when his accounting methods were actually enhancing his profits or even masking operating losses.  As a result, he never made the necessary adjustments that might have saved him when things got bad.”

Right now I see many remodelers in this exact situation – but they might not even know it as a situation, they might just imagine that  things got really bad all of a sudden, oftentimes after months of being really good!

If your remodeling company is on any accounting method OTHER than Percent Complete (also known as WIP [for Work in Process], or Over/Under Billing) then you’re in real danger!

What happens is this:  you start a new job, say in November of 2008, and take a large deposit.  Many of my clients take 20 or 30% when the job starts.  This invoice is booked as income.  Then the job goes on and each invoice to the client becomes smaller until at the 90% completion of the job the client owes you next to nothing.  And you’ve still got all those expensive finish trades to pay.

Without a new job deposit coming in the door, you’ve now got real cash problems and, to make matters worse, your profit and loss statement (also known as the income statement) looks terrible because you’ve got those expensive trade contracts and materials booked as expense without offsetting income.

This is the remodeler’s version of the Ponzi scheme – taking money upfront and then hoping to pay off the vendors and trades with new money from a new client.

It works just fine as long as your sales continue to grow – but a flattening, or worse yet a decline as we’ve experienced, forces the cash flow issue to the front.

The scenario I’ve just outlined has two potentially fatal problems:

  1. You don’t really know what your true gross profit is for the company or for the job at any moment; and
  2. Unless you keep getting new job deposits, your cash flow problems can put you out of business.

The solution is not an easy and will produce some sleepless nights, I’m afraid.  But right now, more than ever, you’ve got to have really good tight financial and job profit information at your fingertips – you’ve got to know these numbers inside out and backwards.  You’ve got to spend at least a couple hours every week going through them until you know you’re safe for the next week, the next month.

Call or e-mail me and I’ll help you!  This is so important to the health of your company that this one change could save everything.

What’s your NPS?

I’m always looking for “Just 1 Number” – that single metric which shows immediately how the company is doing across all departments.  I thought I’d found it and wrote my first Benchmark column on the subject in September 2005.  I called it the SNIPPY which represents an index relating customer satisfaction to net profit.  I’m still fond of the SNIPPY, but I might be the only one.

However the June 2008 issue of Fortune Small Business calls the NPS a “magical metric. It’s called a Net Promoter Score and essentially it measures customer satisfaction and referrals.”

“Here’s how NPS is implemented.  First, ask your customers to rate you on a scale of 0 to 10 based on the question, How likely is it that you would recommend this company to a friend or colleague?  Then sort the responses into three groups:  promoters (9s and 10s), passive (7s and 8s) and detractors (0 through 6s).  The percentage of promoters minus the percentage of detractors equals your score.  A company with 75% promoters and 15% detractors, for example would have an NPS of 60.”

So now you’re wondering what a good score might be.  The article states “as a rule of thumb, score above 50 and you’re a star.”

You might well have this information at hand from client satisfaction surveys you’ve done in the past.  If you’re going to determine your own NPS score, be sure to separate current information (past 12 months, for example) from historic.  That way you’ll have a trend line. Also be sure to accumulate sufficient data to have statistical reliability.  Two clients, for example, would not be a very small sampling on which to base your assumption.

Read the entire article here:

http://money.cnn.com/2008/05/21/smallbusiness/customers_sell_for_you.fsb/index.htm

Technique is EVERYTHING!

Technique is to process as X is to Y

The words system and process have been thrown around nearly indiscriminately for the past 10 years as the panacea for all sorts of problems.

Got a problem with production? Get everybody in the same room, brainstorm the issue, then write a process map, develop a system, and train your people. And bang, just like that the problem is resolved. Onto the next, the thinking goes. And so on and so on, ad absurdum.

I’ve been to offices where the process map wrapped around 3 conference room walls, where the books of systems outlined by area of influence – marketing, sales, design, production, finance and administration – were beautifully organized on a shelf looking as if they’ve never been opened since they were completed.

And to be truly fair I’ve also heard of (not seen in action) a few companies where any new employee either was asked to read or (and this is a true WOW story) actually read before asking questions the complete manual about his area of influence. The WOW story was told by a friend and colleague who hired a new production manager. A month or so into the probationary period, the owner/my friend asked why he’d not been bombarded with questions during that month. The new production manager pulled the now-worn binder from the shelf and said something like “Because all the answers are in here – I haven’t found a question yet which wasn’t well documented in this great book!”

That production manager has now been with the company 8 years and, as my friend said recently, with that kind of initiative, his job was safe during any economy.

But recently I’ve come up against the limits of process – that point at which all the documentation in the best developed manual fails. I believe that point is technique.

Technique is defined by dictionary.com as “method of performance; way of accomplishing.”

Process is defined by dictionary.com as “a systematic series of actions directed to some end.”

See the difference? Process is a series of actions but technique defines the ‘way of accomplishing’ the action.

Without clear instructions on the ‘way of accomplishing’, without technique, you’ve defined only the first 95% of the solution, the final 5% – often the difference between success and failure – remains open to interpretation.

Here’s an example: in one of my early careers, this one as a legal secretary (my first job out of college) I was instructed in the technique of putting a letter in an envelope so that upon opening the letter was removed and opened with the top of the page facing the reader. No need to turn the letter over or unwrap it completely to begin reading. This seemed at the time an enormous idiocy with which I had to comply. Recently I embarked on a mass-mailing campaign in Seattle to introduce myself to the remodeling market and realized that this ‘technique’ learned so long ago still had power – muscle memory – over my actions and in fact made that part of the entire process simple and straight-forward.

Last year Linda Case and I spent a day at the Pella, Iowa campus of Pella Windows where we attended a Continuous Improvement Seminar. This was CI 101. It was fascinating in that it applied shop floor lessons learned from the champion of CI – Edward Demming who transformed Japanese manufacturing during the period after World War II – to the Pella operation.

Many of the lessons learned applied equally well to remodeling projects which take a longer duration. I’ve copied the notes relating to 5-S from that day. 5-S is a ‘mantra’ which seeks to reduce waste by establishing a simple and daily system which any employee can implement and use. It leads to ‘mistake-proofing’ by eliminating choices which can lead to incorrect actions.

From the remodeling point of view, a standard for organization of office/shop/trucks/job sites would lead to simplicity of training, ease with which any employee could note irregularities and increased level of communication and therefore better teamwork, leading to better employee morale.

Levels of 5-S:

Sort – eliminate the clutter:

n For example: start in the shop and put all items of like type together, make one area for miscellaneous. At the end of the sorting process all the stuff in the miscellaneous pile should have been put into other defined piles. The goal here is to REDUCE the miscellaneous pile to nearly nothing. Make a map of where everything is going to go.

Set in order – organize, label, set boundaries:

n For example: organize the shop layout so that all commonly used items are located closest to the door for ease in pulling onto the job sites; put all job site related items into one area of the shop, label the shelves/buckets/clear plastic boxes; establish big boundaries for the entire shop for (1) job supplies; (2) small tools; (3) large tools; (4) scrap and salvaged lumber (this should be a very small pile); (5) salvaged doors/windows etc (another very small pile); etc.

Shine – clean everything:

n For example: ensure that every single tool is clean, has all its parts, works well; clean off all the gunk on the opened paint cans; test the spray paint to be sure it still works and there is sufficient paint; sharpen the saw blades and pick axe blades – etc.

Standardize – create methods for ensuring standardization:

n For example: create index cards showing maintenance schedules for all tools; make chart of the shop showing location and boundaries where each major type of ‘stuff’ is stored; note on the labels of each the date of last review of items contained in the area/shelf

Sustain – create and maintain a supportive culture:

n For example: train, coach and reward all employees in maintaining the shop in its optimal configuration – putting tools away clean and repaired, noting any missing pieces or when the inventory of a commonly used item is insufficient.

Finally, although this isn’t part of the defined 5-S method, it’s vital that the owner/project managers LEAD BY EXAMPLE.

In developing a 5-S mind-set combined with an appreciation of the value of well-defined technique throughout the important parts of each process, the value of process can be realized.

In fact, the October 27, 2008 Wall Street Journal spent nearly a quarter page advocating the 5S method saying:

“5S is a key concept of the lean manufacturing techniques that have made makers of everything from cars to candy bars more efficient.”

Shouldn’t you adopt 5S in your company immediately?

Moral philosophy and cynicism – are you a cynic?

Simon Critchely, author of “The Book of Dead Philosophers”, wrote in the NY Times on 4/2/2009 that “perhaps this recession will make cynics of us all.”   He explains this logic by stating that “cynicism is a moral protest against hypocrisy and cant in politics and excess and thoughtless self-indulgence in the conduct of life.”

The article entitled “Cynicism We Can Believe In” can be read in its entirety at:

http://www.nytimes.com/2009/04/01/opinion/01critchley.html?_r=1&scp=1&sq=SimonCritchley&st=cse

Affluenza – do you have it?

Maureen Dowd in the NY Times today said that we are currently struggling to get over our “affluenza.  That condition, the bane of the middle class, is defined in a book of the same name as ‘a painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more.'”

As I walked back from dinner a couple nights ago with the ever-refreshing Linda Case, we discussed the need to find satisfaction in simplicity.  And I certainly don’t mean to suggest that you should look to the magazine “Real Simple” which suggests that $350 cashmere sweaters represent simplicity.  It doesn’t – it’s just “more stuff-porn” intended to convince consumers that they’re living an elegant and simple life by spending more on it.

Last night I was nearly side-swiped by a Black Escalade with tinted windows.  The license plate read “Buddha”. Was he Buddha?  I doubt it, not unless the reincarnated Buddha suffers from affluenza!

Read the entire column at http://www.nytimes.com/2009/04/01/opinion/01dowd.html?scp=2&sq=Maureen%20Dowd&st=cse