LJV Articles
Job Cost in Small Business
Posted: February 27, 2017 12:40pm
Cost Knowledge - Job Costing Can Play an Important Role for Small Business
March/April Newsletter
Small businesses often get themselves into financial difficulty simply because small business owners tend to have difficulty distinguishing between what the business
“needs” versus what the owner “wants”. A lack of fiscal discipline is one of the top “preventable” reasons for small business failures.
People start small businesses for many reasons. They hate their job, need some side money or always wanted to open a shoe store or cupcake shop. The trouble is that
too many people do not take the time to really think objectively about what their life would be like as an entrepreneur. In business, whether large or small, “balance”
needs to be a core stabilizer in management decisions and actions when it comes to spending. Costs ARE controllable. Sales are less so. As a result, fiscal responsibility
and accountability need to begin at the top of the organizational chart, and cascade downward through the management and worker levels.
Small business owners don’t need to be accountants, but they do need to understand costs, what drives them, and the consequences of “out of control” spending.
Types of Cost
The two types of cost in business are fixed and variable costs. Fixed costs are those that are no impacted by the amount of sales or production. They usually include,
rent, certain types of insurance, utilities, salaries, etc. Fixed costs CAN change over time, although the change (either upward or downward) is not connected to
production, or sales activities ( unless facility capacity changes due to these activities). Variable costs are solely driven by business activities. Categories like direct hourly
labor, overtime, and temporary support, raw materials, and transportation are good examples of activity-based variable costs.
Cost Drivers
In simple terms, a small business needs to control spending on the major cost drivers of the business – labor, materials, and overhead. Obviously, labor and materials
are the primary components of variable costs. Let’s break this down a bit further:
Labor – Headcount is generally the most expensive resource employed in a business. The number of people employed needs to be at the level “required” to support
sales volume. Wages and benefits need to be “competitive” with the industry and with other local businesses competing for the same resources. Additionally, this
resource needs to be managed to an acceptable productivity level.
Materials – Vendors for materials need to be evaluated on a competitive and quality basis. Additionally, adequate controls must be in place to avoid both waste and theft.
Inventory quantities need to be monitored and controlled at levels to support business needs-no more and no less.
Overhead – Business owners need to avoid over expansion – in terms of both facilities, as well as over extending geographic expansion. Over extended fixed costs can
kill a business. Earnings must be able to absorb fixed overhead. Additionally, small business owners need to guard against overstaffing in the areas of SG & A on the
income statement. These costs tend to not be variable.
Job Costing in a Small Batch Environment
Job costing is often used in a small business environment to accumulate costs at a small unit level. For example, it is appropriate for deriving the cost of constructing
a custom machine, designing a software program, constructing a building, or manufacturing a small batch of products.
This method of cost reporting involves the accumulation of the costs of materials, labor, and overhead for a specific job, and it is an excellent tool for tracing specific
costs to individual jobs, or batches, and examining them to determine if the costs can be reduced in later jobs. Let’s take a second look at labor, materials, and overhead
from a job costing perspective:
Allocation of Labor – In a job costing environment, direct labor may be charged directly to individual jobs based on work order identification. All other non-specific
manufacturing –related labor (indirect labor) can be recorded in an overhead cost pool to be allocated to all jobs processed during the accounting period. When a job
is completed, the job costs are shifted from WIP (Work In Process) to Finished Goods Inventory. When the goods are sold, the cost is relieved from Finished Goods
Inventory and charged to the Cost of Goods Sold section of the P & L Statement.
Allocation of Materials – Materials to be used in manufacturing a product or project are recorded in the Raw Materials category of Inventory when they enter the facility.
When a Job/Work Order is created to manufacture a batch, the material is picked from stock and assigned to the specific Job/Work Order shifting it from the Raw
Materials Inventory category to the WIP (Work In Process) Inventory category. If scrap is created, it may be charged to an overhead cost pool for allocation to jobs or
when excess amounts of scrap is created it may be charged directly to the Cost of Goods Sold in the form of unfavorable material manufacturing variances. When work
on the job is completed, the job costs are shifted from WIP (Work In Process) to Finished Goods Inventory. When the goods are sold, the cost is relieved from Finished
Goods Inventory and charged to the Cost of Goods Sold section of the P & L Statement.
Allocation of Overhead – Non-direct manufacturing costs are captured into overhead cost pools to be allocated to open jobs based on a selected measure of cost usage.
Consistency is required in charging the same types of cost to overhead, and applying these costs to jobs in all reporting periods. Otherwise, it will be extremely difficult
for the cost accountant to explain why overhead cost allocations vary from one month to the next.
The accumulation of actual costs into overhead pools and allocation to jobs can be a time-consuming process that can interfere with the monthly closing. To expedite
the process, many businesses allocate standard costs that are based on historical cost performance. Since these standards will never be exactly the same as actual
costs, variances can be:
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Charged to Cost of Goods Sold.
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Allocated to Cost of Goods Sold, Finished Goods Inventory, and WIP Inventory based on ending account balances.
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Charged to jobs that were open during the reporting period.
Since the allocation of an overhead cost pool is by definition inherently inaccurate, it is best to remain practical and keep it simple. Most businesses select to charge
overhead variances to Cost of Goods Sold in the current reporting period
Financial Control Reporting
Financial control reports are informational reports that tell management about a company’s activities. Job Costing is one of the tools that can facilitate this reporting.
The financial department provides management with a format designed to detect variations versus budget, or standards. These reports act as “decision support” tools
to guide management toward positive impactful actions which should improve future performance. On a more global level, management also relies on conventional
financial reporting comprised of the balance sheet, income statement, and cash flow statement to report on the financial condition of the company to outside parties.
Additionally, financial control reports need to provide adequate level of information for management to determine “root-cause” for sales and/or cost variations versus
budget. Good financial control reporting highlights relevant information by focusing management’s attention on those line categories where actual performance
significantly differs from budget.
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It is noteworthy to mention that financial reporting and management control tools cannot prevent business failure when a business owner chooses to ignore them.
The Bottom Line
Small business owners are challenged from many directions. Many may lack a business back ground, or formal business training, and that single factor may be a major
underlying reason for the high rate of small business failures. In the current environment, while the small business owner must wear many hats, he/she must also be
reasonably competent in understanding basic financial implications of actions and decisions. Now, more than ever, a mature and highly skilled financial manager, or
advisor, is often priceless in the value-added to the business management team.
Additionally, I have had very positive, long-term, business experience with Knight Integrated Software (KIS). This regional boutique software developer offers an
excellent and affordable fully integrated financial application solution for job-cost driven businesses. They have a proven record of performance and customer service
success which spans over 25 years. If your business needs a reliable, rock-solid job-cost solution, I recommend you check out this high quality product and service
provider. They are great to work with, and they can provide any customized enhancements your business may require.
What about YOUR organization?
Do YOU need help in getting a better handle on your business costs?
What does “success” mean to YOU?
For more information on how I may be able to help you achieve greater business success, please call me @ 843-245-9753.
Larry Ventimiglio
LJV Business Solutions,LLC
843-245-9753
Your 2017 Management Strategy
Posted: January 10, 2017 2:15pm
Thinking About a Strategic Plan in 2017? – You May Earn BIG Dividends From this Management Exercise
January Newsletter
Happy New Year!
Since we are entering a new year, within a changing political and business climate, I think it may be helpful to expand upon several of my previous newsletters discussing the topic of strategic planning and the role of goals.
In business, clear goals matter. Otherwise, every decision and choice is merely a string of unsynchronized events causing the business to drift aimlessly without direction or purpose. A well written strategic plan is both the map and the path toward the “corporate vision”. Do you remember your “corporate vision”? It’s very different than your personal “dream”. Small businesses survive and grow if they are driven by a corporate vision. The strategic plan helps the business owner/leader to refocus on their singular foundational purpose, requires “strategic thinking” in developing the map, and also requires “strategic actions” to drive the business on the planned path. Both the map and the drive are equally important.
Never lose site of the big picture during the journey, and most importantly, enjoy the ride!
What is Strategic Planning?
Strategic planning is an organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organization's direction in response to a changing environment. It is a disciplined effort that produces fundamental decisions and actions that shape and guide what an organization is, who it serves, what it does, and why it does it, with a focus on the future. Effective strategic planning articulates not only where an organization is going and the actions needed to make progress, but also how it will know if it is successful.
What is a Strategic Plan?
A strategic plan is a document used to communicate with the organization the organizations goals, the actions needed to achieve those goals and all of the other critical elements developed during the planning exercise. In essence, the strategic plan may be viewed as the more dynamic, action-driven “cousin” of the more static business plan.
Importance of Strategic Planning
A well-written strategic plan document sets the direction for the business. It identifies the company’s goals and why they are important in achieving the “corporate vision”. The strategic planning process provides opportunities for managers to collaborate in developing ways to improve performance via business development into new market segments, developing and launching new products/services, geographic expansion, organizational restructuring, capital expansion, technology improvements, consolidation of activities/operations, etc. Additionally, it provides an opportunity to engage in an honest appraisal of the organization’s strengths and weaknesses. The process drives a management team to determine what is relevant, what is important, and what is actionable.
The results of the strategic planning process assist corporate decision-makers in moving forward through a perpetually changing business environment riddled with economic uncertainty, advancing technology, changing governmental regulations/compliance requirements, evolving competitive challenges, and workforce opportunities and challenges. The strategic plan permits the business owner/leader to view, prioritize, and act upon these opportunities and challenges within a more balanced and purposeful perspective. “Act” is the key word, here. An effective strategic plan is an “actionable” document, and it illustrates the process which translates the corporate vision into reality for your financial partners (investors and bankers), managers, and employees. It insures that everyone is operating from the same playbook, and it must not merely reside in your head. Remember, business is collaborative!
What Are the Steps in Strategic Planning & Management?
There are many different frameworks and methodologies for strategic planning and management. While there are no absolute rules regarding the right framework, most follow a similar pattern and have common attributes. Many frameworks cycle through some variation on several very basic phases:
1) Analysis or Assessment - Where an understanding of the current internal and external environments is developed.
2) Strategy Formulation - Where high level strategy is developed and a basic organization level strategic plan is documented.
3) Strategy Execution - Where the high level plan is translated into more operational planning and action items. This is the “action” element phase of the plan where concepts transform into managed and monitored actions within defined time lines.
4) Evaluation or Sustainment / Management Phase - Where ongoing refinement and evaluation of performance, culture, communications, data reporting, and other strategic management issues occurs.
The Role of Goals Within the Strategic Planning Process
If the strategic plan is viewed as the map and path toward the “corporate vision”, goals are the vehicles that initiate actions which lead to tangible results. A common “corporate vision” is SUCCESS. Success may be defined very differently by business owners/leaders, but I define “success” as financial success, or the accumulation of financial wealth. It is noteworthy to mention that most organizations register a dramatic improvement in employee and business performance when they effectively set individual employee goals and closely tie them to the company’s overall strategy.
Setting Goals
Goal setting should be a collaborative process between manager and employee, and must be within the S-M-A-R-T framework.
Specific: Goals need to be well-defined to inform, set clear expectations, when delivered, and how much to deliver.
Measurable: Identify milestones to track progress and motivate employees toward achievement.
Attainable: Success needs to be achievable. Not too high-not too low
Relevant: Meaningful to the overall company strategy
Time-framed: There needs to be enough time to achieve the goal. Goals without deadlines tend to be easily overshadowed by daily crises.
Organizing Goals
Goals need to be organized and aligned to insure a consistent “fit” with the strategic vision. To achieve
goal alignment, you must insure that the strategic vision has been effectively communicated across the
entire enterprise. Managers need to have access to and view goals of other departments. Doing so, will reduce redundancy AND permit managers to support each other and more openly collaborate. Remember, business is collaborative! When well-executed, this is a team-building process. Goal alignment:
- Strengthens leadership
- Builds teamwork
- Encourages employees to work toward the same corporate vision
- Clearly delegates identified responsibilities
- Bolsters accountability
The Bottom Line
For most entrepreneurs, the foundational purpose of a business is to gain personal wealth. Consistent corporate productivity (net income) is the primary source of personal wealth. It’s way more than just SALES! Like it or not, it’s everything below the SALES line on the income statement. A business is comprised of multi-disciplined components (i.e., Sales, Marketing, Manufacturing, Research, and Administration) which are in constant motion and (hopefully) synchronized with each other. The successful business “leader” Manages, Organizes, Directs, and Controls each of these components and, as a conductor of a symphony, successfully drives them toward the foundational purpose of the business – the accumulation of corporate and personal wealth, or NET INCOME.
Effective business owners/leaders embrace the strategic planning process as an ongoing way of corporate life. You need to use it, or you lose it. You won’t be successful if you place it on your bookshelf, and bring it out annually. That’s just not enough.
A strategic plan should be reviewed and revised as often as possible to update milestone events/benchmarks, timelines, and revise strategies when new opportunities or challenges present themselves. The plan needs to offer ongoing relevance in order to maintain an ongoing effective business growth strategy.
The plan needs to be a “living” document.
Additionally, an effective strategic plan provides a benchmark to measure an organization’s progress toward strategic growth success. It can act as a guidepost for all decisions, while keeping your management team focused on the corporate “big picture” goals.
What does “success” mean to you?
For more information about how I may be able to help your team achieve greater business success in 2017 and beyond, please contact me.
Larry Ventimiglio
LJV Business Solutions, LLC
843-245-9753
Larry@LJVBusinessSolutions.com
Spirituality in Business?
Posted: November 01, 2016 2:18pm
Spirituality in Business – Is it a Good Thing?
November Newsletter
In my October Newsletter, I broached the topics of accountability and integrity and their potential roles in business performance. This month, I’ll segway into the
related topic of spirituality in business, and the recently trending role it has been playing in both small and larger businesses.
Spirituality is awareness that we are all connected to each other and to a greater or Supreme Being. While each of us is unique and special, we are all the same.
In business, the concept of spirituality offers a wide range of noteworthy perspectives. Some people may say that it’s simply the embodiment of their personal values
of honesty, integrity, and good quality in their work. For others, it may be treating their co-workers and employees in a responsible, respectful, and caring way. Others
may claim it is participating in spiritual study groups or using prayer, meditation, or intuitive guidance at work. For some, it may be making their business socially
responsible in how it serves their community, impacting the environment, or helping to create a better world. You may have even noticed several of these themes in
recent corporate advertising and promotion in several different forms of media.
The Role of Fear in Pointing us Toward Spirituality at Work
Over the past several decades, various factors have caused an increase of fear in the workplace. I’ll highlight several of them below:
Corporate Downsizing- While the benefits of corporate downsizing include increased profits, reducing redundancies, and streamlining the business, downsizing also has
a downside. Most notably, it causes pain and suffering. Although it initially causes pain for those people who have been let go, it also inflicts pain on those people left
behind, and who are asked to increase productivity with fewer resources, and for the same pay. Surviving employees quickly become stressed out and fatigued. They are
anxious about the security of their jobs and their futures. The worst possible result occurs when employees don’t see any light at the end of the tunnel, and any vision of
hope is snuffed out. While downsizing works in the short-term; in the long-term, it hampers loyalty, experience, creativity, engagement and a fuller expression of the
human spirit.
Offshore Export of Jobs - Over the past several decades, many jobs and corporate functions have been relocated offshore. It began with manufacturing, and transitioned
into service jobs, as well. For example, the US use to be the global center for many IT development companies. Then overseas programmers and developers were
imported to the US working for those companies. Finally, US-based functions at those companies were exported to less costly overseas locations, taking advantage of
lower-cost talent, foreign economies, less responsible local regulation, and foreign tax havens. Other examples of job exports include Purchasing, Billing, Customer
Service, and Accounting functions.
Advancements in Technology – We’ve learned over the past 20 years, or so, that successful companies also lay off employees. That’s never happened before. Historically,
it was commonly believed that only businesses with fiscal problems would lay off employees and successful companies retained and even hired additional people. Times
have changed! Advanced technologies and corporate re-engineering have changed the employment resource needs of many successful businesses.
When you consider all of these factors together, the work contract – the implicit agreement that I will come to work for you for life, in exchange for employment
security – has been terminated. Jobs are no longer secure and that causes insecurity, anxiety, and fear. Most of us have spent most of our waking hours at work, so there
has been a growing sense of “dis-spiritedness” in the workplace. As a result, this profound change in the workplace dynamic has resulted in a greater sense of employee
dis-engagement.
A Growing Movement Toward Spirituality in Business
Researchers point out that the current globalization of markets requires greater creativity from business. To survive in the 21st century, organizations must offer a greater
sense of meaning and purpose for their workforces. In today’s more competitive environment, the best talent seeks out organizations that reflect and will support their
inner values and provide opportunities for personal development and community service, not just bigger salaries. Today’s Internet information and services-dominated
environment requires more instantaneous decision-making, and building better relationships with both customers AND employees.
Additionally, spending more time at work places additional pressures on time available for religious and spiritual activities. Many people are feeling more comfortable in
public expression of their faith, and a growing number of companies are permitting employees to conduct religious prayer and other activities at workplace locations.
This offers accommodation for busy professionals, pressed for time, and concerned about having to abandon their faith.
A growing number of women in the workplace are an additional factor in the rise toward spirituality in the workplace. Women tend to focus on spiritual values more
frequently than men. The aging baby boomer generation is also a contributing factor, as boomers are finding materialism no longer satisfies them as they begin to fear
their own mortality.
The Bottom Line
When making ethical decisions, no one stands outside a social and cultural world. Each of us judges human reality according to a set of adopted and adapted moral
criteria based on such factors as nationality, education, social class, professional occupation and of course, religious or spiritual affiliation. Choosing to do the right thing
for the right reasons seems like such a simple rule of business. Religion and spirituality are both faith-filled beliefs which provide a point of reference for ethical decision
making in life and in business.
It is also noteworthy to mention that various spiritual and Christian-based professional organizations have emerged to support business development. Perhaps the largest
and most well-known professional networking organization is BNI, or Business Networking International. This organization has been in service for 30 something years and
membership numbers over 200,000 members in over 68 countries, worldwide. BNI is based on a simple Christian premise – “Do unto others as you would have them do
unto you.” This simple truth is alive and well in the 21st century. I encourage you to visit their website and check it out. This may be an organization worthy of your time
and attention. It works for me and 200,000 other professionals who employ networking as one of the critical tools driving their business development.
What about YOUR business?
Are your core business values based on a spiritual or religious foundation?
What does “success” mean to YOU?
For more information on how I can help your management team achieve greater business success, please contact me.
Larry Ventimiglio
LJV Business Solutions, LLC
843-245-9753
Integrity In Business Culture
Posted: July 06, 2016 12:46am
Accountability and Integrity: Are They Part of YOUR Business Culture?
October Newsletter
Choosing to do the right thing for the right reasons seems like a simple rule of business. Being accountable simply means being responsible for decisions made, actions
taken, and tasks completed. However, both accountability and integrity often get lost in the day-to-day grind.
In business, accountability is a management control function in which periodic evaluations (performance reviews) are given for a person’s actions (performance).
Evaluations can be either positive or negative. Depending on the evaluation, the person might need to modify his or her behavior. In other words, accountability refers
to individual responsibility for work performed and answering to peers and superiors for performance.
Creating a “Culture of Accountability”
Accountability and integrity in business does not just happen. You can’t just morph it into new employees. The truly successful companies have built their success and
reputations upon a “culture of accountability”. Let’s take a closer look into several core elements of what I’m describing as a “culture of accountability”:
The Role of Clearly Defined Results
The first step in creating a culture of accountability is to define and communicate clear results within the organization. Whether it’s a sales goal, a product delivery goal,
a profit goal, or a minimum return on investment goal, make sure you define and communicate the goal. Everyone in the organization must KNOW what they are working
for AND how their job pushes the company toward achieving that goal. Additionally, management must generate joint accountability for results. If the team has not
achieved its targeted results, it should be impossible for any single employee to even think that he or she has done their job. No one wins if the team doesn’t win!
Achieve Results, Rather Than Do the Job
Many organizations have a task-oriented mind-set. They promote the concept, and give employees the idea that they are getting paid and using their skills to perform a
defined function or set of tasks. This leads employees to believe that if they perform their functions they’ve done what they’re supposed to do, whether or not the result
was achieved.
Effective leaders operate on the premise that their employees must focus on achieving results. They lead people beyond the boundaries of their jobs and inspire them
to pursue results by creating an environment that motivates them to ask, “What else can I do?” until the results are achieved. Each employee’s daily activities must be in
alignment with the targeted results.
The Importance of Forward Vision
A results-driven view of accountability can revitalize the business character, strengthen global competitiveness, elevate innovation, and improve the quality of products
and services produced by companies. You can direct your own destiny only when you assume full accountability for your thoughts, emotions, actions, and results.
Otherwise, someone else will. The real value of accountability stems from the ability to proactively influence events and outcomes before they happen, rather than
reacting to them after they have already occurred.
Leadership’s Role
In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies. In matters of core business
ethical values like accountability, it begins at the top of the organizational chart, and drills downward and throughout the organization. Additionally, accountability
encompasses the obligation to report, explain, and answer for resulting consequences. Since leaders often make decisions with far-reaching consequences, accountability
has a substantial ethical element. This is where integrity comes into play. Accountability and integrity are daily decisions, not one-offs reserved for executive decisions
by the CEO. Every employee must adhere to these core ethical values in all tasks they perform. If a business doesn’t maintain integrity in the small things, no one will
believe it has integrity in the big things.
Unlike politicians, businesses can and must admit when they have fallen through on promises. Not all decisions made will be the right ones, but open and honest
communication about those situations maintains both integrity and accountability.
The Bottom Line
When leaders visibly hold themselves and their own direct reports accountable, they send a powerful leading-by-example message to the rest of the organization.
There are no favorites here. Accountability begins at the top – no excuses and no exclusions. Improving a culture of accountability and integrity in an organization is a
complex process, and not something done by flipping a switch. It can be accomplished over time by building a management infrastructure that supports it. Sound
compensation policies, results-driven standards, and managers with integrity who are trained to confront difficult issues head-on are all part of a culture that values
accountability, integrity, and ultimately improved operating performance.
What about YOUR organization?
What does “success” mean to YOU?
If these areas of your business concern you, I can help you drive your business to a better place, so give me a call. I’m here to help.
For more information, please see my website @ www.LJVBusinessSolutions.com.
Larry Ventimiglio
LJV Business Solutions, LLC
843-245-9753