By the Seat of His Pants –– A Case Study

It’s not unusual for first time entrepreneurs to concentrate on the operations part of their businesses. Financial reporting isn’t as important as providing products and services to the client base. After all, that’s what generates revenue. And for some business owners who have started, built and sold multiple businesses, they feel that they’ve developed a sense of how businesses operates and that they have less need for financial reporting or internal controls. 

It’s when they feel that they fully understand what’s happening and what they need to do to build their business that they run into trouble. Sometimes, when the business is small, the consequences are small as well. But as a business grows, it’s impossible to remember everything and keep it all in your head. Being able to look at the progression of reports, and use those reports to help develop staff allows a business to grow strategically. Otherwise, you’re operating your business “by checkbook.” 

• Business – Home repair and roofing company
• Location – San Diego, California
• Sales – $5.5 million
• Ownership – Single owner

Initial Contact –

The owner of the bookkeeping service the company was using knew that the owner was interested in selling his business in the near future. She also knew that he had successfully sold other businesses in the past. But this time, things were a bit different. The business was larger, and he was spending more time enjoying surfing in the morning than getting his construction crews on the road. With some outside advice, she felt that the owner could successfully grow another business and achieve another successful sale.

Significant Findings and Recommendations

Project Profitability –

The salespeople wrote detailed estimates on every job that they quoted. Management was concerned that the profitability on the various jobs was inconsistent. The owner felt that he had a handle on job profitability, and understood which jobs were sub-standard. He felt that as long as the staff wrote up the jobs correctly, the profits should flow to the bottom line. A review of the last two months’ construction projects showed that there was inconsistent profitability of jobs across the board, coupled with missing and incomplete paperwork.

Recommendations –

• Establish a consistent procedure for writing estimates so that they accurately reflect the actual work that needs to be done on each job. Additional work needing to be done on the jobsite requires an additional estimate and an approved change order signed by the customer. 
• Use the change order to create the purchase order for the additional materials for the job. This also improves internal controls to make sure that any materials purchased are allocated to a particular job.
• That same change order will also update the time required on the job, and will allow a restructuring of the staff commitments and the backlog reports.
• Develop a profitability report that is calculated on each job that is scheduled and completed. At the beginning of the next week, a staff meeting would allow everyone to go over the profitability of the past week, and focus on the changes and the individual job profitability that don’t meet company standards. 
• Control the cash! Some of the jobs were flagged as being cash jobs. Though it might be tempting to do jobs for cash, this creates a situation where staff might be tempted to offer to do additional work on the side for “cash.” Those jobs wouldn't show up in company paperwork, purchase orders or receipts. Controlling the cash, and limiting payments to credit cards and checks eliminates this profitability leakage. 

Staffing –

Middle management staff was loyal and had been with the company since the start, but the owner believed that they were overpaid and under achieving and not working up to their full potential. This added fuel to the fire about whether the company had the right people in the right positions to support its growth. Since many had been with the company since its inception, what additional training would they require to be fully supportive of the Company’s current and future needs? As the company grew, staff was hired as needed without a definitive or long term plan in place. This resulted in hiring based on a momentary need rather than a strategic plan. 

Recommendations –

• Develop a strategic plan for staffing that would apply to the company as sales increased. A matrix should be created for the hierarchy of the company-based sales, number of crews needed, quantity of supervisors needed, and a comparable need for support staff in the office. 
• Evaluate front office skills and needs. Currently the company was using an outside service for bookkeeping. As the company grew, this work could be brought inside, making the entire back office more efficient. 
• From the strategic plan, write job descriptions and identify specific skill levels needed for each position to fulfill the requirements of each job. For existing staff, determine how they will fit into the new, growing organization, and provide the training and opportunities to allow them to take a key role in the company’s day to day operations.   

It’s not unusual for companies to forget that there’s a need for planning and structure as a company grows. The camaraderie, close personal relationships and unstructured way that young companies function is great for that phase of their development. The problem is that the lack of structure and planning ends up creating holes in the internal controls needed to keep profits flowing. Establishing proper procedures, forms and reporting assures that people not only know how the company is supposed to work, but confirm that each step in the operational flow of the business – sales, purchasing, staff scheduling and invoicing happen properly.

In the growth of any company, both management and line staff get used to the way that they’ve been working. It’s not unusual to think that the way that they’re working is the right way, because they get blinded when addressing the same issues over and over becomes commonplace. Sometimes bringing in an outside individual also brings in new ideas, organizational plans and approaches. Those can help drive innovation, or even just increased control and efficiency. Change isn’t a bad thing, it’s just different. 

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