STRATEGY TO MANAGE YOUR MONEY$

Harry WattNorth Carolina State University

and Assisting the US Forest Service’s Wood Education And

Resource Center

Web at www.cnr.ncsu.edu/woodworkshops

Tuesday, November 8th, 2011

figuring out how to keep some of the money that passes through the business!

North Carolina State University Wood Products Extension

Since 1950 has supported the wood products industry in North Carolina in the areas of wood education, training, troubleshooting problems, research and overall assistance in making a large variety of wood products.

It is the policy of the State of North Carolina to provide equality of opportunity in education and employment for all students and employees. Educational and employment decisions should be based on factors that are germane to academic abilities or job performance. Accordingly, the North Carolina State University (“NC State”) does not practice or condone unlawful discrimination in any form, as defined by this policy.

Wood Education and Resource Center• Is the center of the US Forest Service effort of support of the

hardwood forest industry in the states east of the Great Plains• Located in Princeton, West Virginia, www.fs.fed.us/werc• WERC project’s websites = www.cnr.ncsu.edu/woodworkshops and

www.cnr.ncsu.edu/usalocalwood

The work upon which this webcast is based was funded in whole or in part through a grant awarded by the Wood Education and Resource Center, Northeastern Area State and Private Forestry, U.S. Forest Service.In accordance with Federal law and U.S. Department of Agriculture policy, this institution is prohibited from discriminating on the basis of race, color, national origin, sex, age, or disability. To file a complaint of discrimination, write USDA Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 Independence Avenue, SW, Washington, DC 20250-9410 or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity provider and employer.

Keeping Some Money is the Goal of the Business!

• Have to focus some time and effort watching the $

• The business has to make money to stay in business

• High volume sales is great but high profitability is better!

• Not everyone owner or manager seems to know this!

How Do You Manage the Money$?

• Classic Management Science calls this “Control”

• Control means we pay attention to all the details-money

• Money is moving all the time-sometimes in and always out

• You control money by having a good management system and use the system on a daily basis

You Gotta Have a System!

• A system is a formal way you do the everyday tasks such that success is expected

• You must have a system for everything, even if you are a one man shop

• The system covers all the bases-large and small

• Your system has to make sense, be affordable and work!

Constructing a $ Management System

• Start with a budget– Review company’s goals and objectives– Management creates a business plan– Budget supports the business plan in a realistic way– Budget details the $ in and $ out– Budget reflects challenges/actions to what can and

cannot be pursued– Budget has to deal with reality

Tracking the Flow of Money

• Small businesses can operate with a paper system but given the power and low costs of accounting software, today it’s better to use a software accounting system

• Every $ in and $ out has to be tracked

• Must have a paper trail for all events-purchase orders, invoices, receiving tickets, production reports, material issues, inventory counts, payroll hours, etc.

Budget Follows P & L Format

• Revenues-where does they come from, quantities and prices

• Expenses-main categories for manufacturers– Materials– Direct labor– Factory overhead– Generals, sales and administrative overhead

Budget Follows Business Plan

• Should show a satisfactory profit

• Should challenge each detail for improvements in every category-revenues and expenses

• Should break down the annual budget into quarters and months because of seasonal swings in revenues and expense

Profit Planning Techniques

• Most powerful technique is the Profit Planning Spreadsheet

• Uses budget, cost, scheduling and bid information to project the monthly P & L in advance based on the company’s production schedule

• Benefit-gives a projection in advance of events so the future can be altered for improvements

Example-Profit Planning Spreadsheet-bid commercial manufacturer

Example Profit Management $10,000 Per Week Schedule Small Business Harry WattInitial Situation

Factor Job $ Job $ Job $ Job $ Job $ Job $ Job $ Job $ Job $ Job $Job # Job $ Material $ Materials Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Job $

Job 200 $14,000 $5,600 0.40 $10,000 $4,000 $14,000Job 201 $9,000 $3,780 0.42 $6,000 $3,000 $9,000Job 202 $17,000 $8,670 0.51 $7,000 $10,000 $17,000Job 203 $5,000 $2,300 0.46 $5,000 $5,000Job 204 $13,000 $6,760 0.52 $5,000 $8,000 $13,000Job 205 $6,000 $2,880 0.48 $2,000 $4,000 $6,000Job 206 $22,000 $9,460 0.43 $6,000 $10,000 $6,000 $22,000Job 207 $32,000 $14,400 0.45 $4,000 $10,000 $14,000

$118,000 $53,850 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $100,000

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10Revenues $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $100,000

by %Expenses Materials $4,000 $4,120 $4,830 $5,100 $4,900 $5,120 $4,500 $4,300 $4,380 $4,500 $45,750 45.75%

Direct Labor $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $20,000 20.00%Overhead $3,100 $3,100 $3,100 $3,100 $3,100 $3,100 $3,100 $3,100 $3,100 $3,100 $31,000 31.00%Total Expenses $9,100 $9,220 $9,930 $10,200 $10,000 $10,220 $9,600 $9,400 $9,480 $9,600 $96,750

Profit $900 $780 $70 -$200 $0 -$220 $400 $600 $520 $400 $3,250 3.25%% Profit 9.00% 7.80% 0.70% -2.00% 0.00% -2.20% 4.00% 6.00% 5.20% 4.00% 3.25%

Can use as a prediction tool so you can make adjustments to improve the profitability.This example shows a manufacturer who needs more attention to managing the business.

Controls-Simple Biding System

• Estimate material costs with allowances for unit purchases and yield losses

• Estimate direct labor costs-can use #days x $labor/day

• Estimate overhead costs-can use #days x $overhead/day

• Biggest ? is how to handle overhead costs-per day basis but how many days/year or month

• Jobs that slide beyond the bid #days = losing profits!

Example-Profit Planning Spreadsheet-5% Reduction in Expenses = 3x Profits!

Example Profit Management $10,000 Per Week Schedule Company With Better Expense Control5% Cost Reduction

Factor Job $ Job $ Job $ Job $ Job $ Job $ Job $ Job $ Job $ Job $Job # Job $ Material $ Materials Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Job $

Job 200 $14,000 $5,320 0.38 $10,000 $4,000 $14,000Job 201 $9,000 $3,591 0.40 $6,000 $3,000 $9,000Job 202 $17,000 $8,237 0.48 $7,000 $10,000 $17,000Job 203 $5,000 $2,185 0.44 $5,000 $5,000Job 204 $13,000 $6,422 0.49 $5,000 $8,000 $13,000Job 205 $6,000 $2,736 0.46 $2,000 $4,000 $6,000Job 206 $22,000 $8,987 0.41 $6,000 $10,000 $6,000 $22,000Job 207 $32,000 $13,680 0.43 $4,000 $10,000 $14,000

$118,000 $51,158 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $100,000

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10Revenues $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $100,000

by %Expenses Materials $3,800 $3,914 $4,589 $4,845 $4,655 $4,864 $4,275 $4,085 $4,161 $4,275 $43,463 43.46%

Direct Labor $1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $19,000 19.00%Overhead $2,945 $2,700 $2,700 $2,700 $2,700 $2,700 $2,700 $2,700 $2,700 $2,700 $27,245 27.25%Total Expenses $8,645 $8,514 $9,189 $9,445 $9,255 $9,464 $8,875 $8,685 $8,761 $8,875 $89,708

Profit $1,355 $1,486 $812 $555 $745 $536 $1,125 $1,315 $1,239 $1,125 $10,293 10.29%% Profit 13.55% 14.86% 8.12% 5.55% 7.45% 5.36% 11.25% 13.15% 12.39% 11.25% 10.29%

Lesson on Expenses

• Profitability is leveraged up and down by how well you control expenses-the break event chart concept shows the power of leverage to profitability

• Small improvements in every area pays off big $

• Weekly control is needed for wood products businesses

• Remember-four good weeks = one good month and twelve good months = one good year. Make sure every week is a good week, then you don’t have to worry about having a good year!

Small Profit Margin Businesses Have to Be Busy to Make an Acceptable Profit

• Wood products businesses operate in a competitive business climate

• Must offer some extra value/uniqueness to increase profit margins

• Must be busy in order to make an acceptable profit

• The orders and customers must be analyzed for profitability and only profitable customers and orders are targets

Theory of the Long Tail-offer more stuff

• Create dynamic designs that grow or shrink automatically with changes in product dimensions

• Offer the full gambit of options from a small set of raw materials

• Have a quick design system

• Follow a make-to-order business strategy-make what the customer wants when they want it

The Future Will Go the Fast or Faster

• Faster to the customer will determine business success and the size of the profit margin

• Fast has to occur in the office as most shops are faster in the plant that in the office

• You want to be so fast that the customer does not have time to change their mind or modify the order

• Being fast changes the dynamics of the cash flow

Ideas to Improve Profit Margins in Today’s Economy-1

• Go overboard in marketing-lots more than in the past and lots more than the competition

• Who ever is in charge of sales must get out more and make lots more personal contact

• Flexibility is the name of the game, say yes at a profit

• Think of the Long Tail Theory-make money on the low volume high variety orders

Ideas to Improve Profit Margins in Today’s Economy-2

• Review your finances every week

• Make a schedule and profit projection every week

• Be active in improving the projection-fight for that margin-raise prices, become more productive, use lower cost materials, etc.

• Identify all the issues that are causing problems and use your management system to fix-don’t live with problems!

Business Strategy-Stand on Something

Lots of alternatives-pick one that fits your business-• Quickest delivery• Low price• Best value• Most functional• Best image• Best service• Easiest vendor to deal with• Unique species• Best finish• Plenty of time to pay

Look at Lower Cost Minor Species

• Species include beech, sycamore, sweet gum, wormy red maple, hackberry-FAS < $500/mbf green at sawmill

• Minor species hardwoods offer lower wood costs with woods that work well in natural, stain and paint finishes

• Can use solid panels for exterior cabinets to replace plywood given that interiors are now often laminate

• Will have to work directly with a mill and drying yard because most distributors don’t carry upper grade minor species hardwoods

Summary-Managing the Money$

• Your plan should show you making a profit

• A written business plan is important

• Budgeting is a key for success

• Use the weekly profit scheduling spreadsheet to show you the importance of starting and ending jobs on time

• Managing the business under control is an important business strategy