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There is a popular move afoot among businesses today to shift cost from fixed to variable.  This allows the business to react much more quickly to changes in their environment, such as the recession.

According to associated Press writer, David Gram, The Society for Human Resource Management, representing company personnel departments nationwide, said it surveyed members in October 2008 and found 12 percent of them were moving to use more independent contractors, contingent and temporary workers because of the recession.

For a growing number of companies, including Target, FedEx Ground and Comcast, cutting costs means removing workers from the payroll or bringing on new workers — sometimes through intermediary companies — without making them full employees.

If a company employs the bulk of its workforce, downsizing can take time and cost a fortune (especially if severance is provided to the terminated employees).  They likely pay employee health, dental, vision and life insurance costs, for example, and the employer’s portion of payroll withholdings.  They will also be on the hook for unemployment insurance and workman’s compensation.

If that same company utilizes contract labor wherever possible, however, they are much more nimble and able to execute on plans to quickly reduce monthly operating costs.  If sales decrease, reliance on the associated independent contractors can decline accordingly. 

Shifting to a more variable cost structure, however, is not without risk.  A company needs to carefully evaluate their worker classification to ensure that they are not labeling an individual as an independent contractor when that person is really an employee.

The most widely accepted test is called the “economic reality” test.  In United States v. Silk, 331 U.S. 704 (1947), the Supreme Court identified the following factors:

1. the degree of control exercised by the alleged employer;
2. the extent of the relative investments of the [alleged] employee and employer;
3. the degree to which the "employee's" opportunity for profit and loss is determined by the "employer";
4. the skill and initiative required in performing the job; and
5. the permanency of the relationship.

Basically, it comes down to this: if the person spends all of their time with this one company, and has no other clients, they look a lot more like an employee than an independent contractor.

Labeling your workforce incorrectly can become costly down the road, so it’s best to do your homework in advance, and classify your labor correctly at the outset.

How to Change the Change Process

By Philip Elworth

Three things need to happen at the same time if you want change to occur.  You need to change the situation and you need to influence both the heart and mind of those who need to change.

Kotter and Cohen say in their book The Heart of Change that real change happens in the following order, SEE-FEEL-CHANGE.  Emotion needs to be involved not logic.  We all know when we need to change something but knowing does not make it happen.  The authors site an example in this book where a manager of a large manufacturing organization knew the firm was wasting large sums on inefficient purchases.  But how to effect the change was the question.

To prove his point this manager sent out an intern to investigate the purchasing process of one single, low priced item, work gloves.  The intern discovered that the various factories were purchasing 424 different types of work gloves.  He collected a sample of each one and labeled them with the price paid.  They were all using different suppliers and negotiating their own prices.  Gloves of similar type had prices ranging from $3.22 to $10.55.  The manager made an exhibit of his finding by placing them in a pile in the board room table in front of senior management.  They were stunned at the visual display of inefficiently in a simple low cost item.  When they saw the display their response was silence, but it could have been “this is crazy, we are crazy, we’ve got to make this stop happening”. 

What do you think would have happened had this employee put a spreadsheet together showing the inefficiency?  This manager could have preached this topic forever and not had the same effect.  Until the powers that be could see the situation and feel it, then they would not be motivated to change.  The logic of the inefficiency would not have swayed them.

Chip and Dan Heath unpack this topic in detail in their new book entitled Switch.  They state that the core matter of change is about changing behavior.  See-feel-change, not analyze-think-change.  So how do you go about changing behavior?

 One way is to shrink the change.  If you could begin to invest in getting in shape by exercising 1 minute a day would you do it?  I would advocate that if you invested this one minute a day for a period of time, it would change your mindset and allow you to slowly move up to the 20-30 minutes necessary for fitness.  But a commitment to one minute is doable, shrink the change.  Where else could you apply this concept?

A second means to change is to instill a growth mindset.  Plan to fail.  If you start a diet and blow it one night are you done with dieting?  If you consider the possibility that you will fail and plan for it, it will be easier to pick up the pieces and move on.  The mind is like a mussel, practice and attempts to learn or change create new pathways for change to happen.  No skill learned over time was ever completed without some level of failure.  So plan for it and it will not devastate you.

A third way to instill change is to find the bright spots and celebrate them. Whether raising kids, training employees or changing you.  Find what is working, celebrate it and do more of it.  Encouragement and praise will always take you further than negativity.  So start by celebrating your success no matter how small it may be.

Change can be hard but when properly undertaken success can be achieved.

Fortune Magazine published an article years ago named, Permanent Vacation? 50 and Fired.  I would like to expand on a few things regarding this topic. First, let’s visit some of the quotes from the article, which was years ahead of its time:

“You’ve got hundreds of thousands of obsolete professionals who can’t find employment in positions where they’ve been successful. These are people living off retirement savings 15 years before they were supposed to retire. They don’t know what they’re going to do.”

“Peter Capelli, a professor at the Wharton School, says the executive recruiters he talks to don’t want older people who have tenured compensation – not when they can hire younger, cheaper people. ‘It makes economic sense,’ he says ‘It’s just hard on employees. They were hugely valuable yesterday, because they performed valuable skills. And now they’re tossed on the general labor market where they’re suddenly not worth much.’”

“…there’s a good chance they’ll end up in a category you might call involuntary consultants.”

“’My heart really goes out to the 55-year-olds who can’t come to terms with  what’s happened to them,’ says Lynn Guillory. ‘They are still looking for the old implied employment agreement: The company would take care of you; all you had to do was work hard.” Forget the paycheck, he tells them. Your W-2 days are over. It’s a 1099 world now.’” (Fortune Magazine, Permanent Vacation? 50 and Fired, May 2, 2005)

IT’S A 1099 WORLD NOW!

The thought that the “W-2 days are over” can be a very frightening thought for many professionals.  I have talked to hundreds of CFOs over the decades and understand the thought process and the fear that overcomes one regarding this topic.

In fact, I remember the conversation I had with my wife when I told her I was going to start B2B CFO back in 1987. We had four small children under the age of eight and my wife was a stay-at-home mother. After explaining what I was going to do she looked off into the distance for a few seconds and then turned back to face me.  I saw the fear in her eyes. She asked me only one question, “Jerry, what about a steady paycheck?”

Christine and I have not had a W-2 check since 1987 and we would not want the pay-cut by accepting a W-2 job today.

This 1099 concept may be foreign to some, so let’s visit The Millionaire Next Door:

“Being self-employed gives one much more control over one’s economic future than does working for others. Conversely, employees today, even high-income-producing executives, have less control over their livelihoods than ever before.  Downsizing, for example, is taking its toll, even among the most productive employees. More often than not, even high-income-producing employees are not likely to be millionaires.” (page 93).

INVOLUNTARY CONSULTANTS:

There are several problems with being forced into being an “involuntary consultant,” such as:

(1)   The lack of time to plan before starting the business.

(2)   One’s heart may not be fully into the business. There is no transparency with this topic. Astute business people will see the lack of “fire in the belly” and will be cautious to hire such a consultant.

(3)   The lack of training on the proper way to sell.

(4)   Lack of knowledge about the industry, which is very specialized and very competitive.

(5)   Inadequate funding to do the branding and marketing correctly.

(6)   Unknowingly creating exposure for future litigation against the involuntary consultant.

(7)   Inability to distinguish oneself from the competition, hence, falling into the trap of charging lower fees than one is worth.

(8)   Etc.

 So, it REALLY is a 1099 world now, but that gives opportunity and freedom to many of us.

Joanie Gable of Birmingham, a CFO for hire, right, chats with Jessica Kirk Drennan of The Crittenden Firm. Drennan had Gable assist her in researching financial documents in a divorce case last year. (The Birmingham News / Frank Couch)

By Roy L. Williams -- The Birmingham News; 2/10/2010

Joanie Gable of Birmingham is a CFO for hire.

In 1990, she left a 15-year corporate career as a chief financial officer to form Accounting for Profits Inc., a firm in which she was hired out as a part-time finance chief for businesses across the Southeast.

In May 2009, she joined Phoenix-based B2B CFO as its first Alabama partner. B2B CFO has 146 partners across 39 states that provide chief financial officer services for small and mid-sized companies. Gable says going from a one-person operation to joining a network of CFOs was a smart move.

"It was a step up in my career," Gable said. "Now I have a wealth of knowledge to draw resources from."

When she started Accounting for Profits, the idea of companies turning to outside CFO consultants was in its infancy, Gable said.

" I was told I couldn't do this for a living," Gable said. "Now it is catching on. It is a growing trend in today's troubled economic times as companies turn to seasoned outside financial professionals."

Firms are finding renting a CFO can be substantially cheaper, Gable said. The average annual salary for a full-time CFO in a small to mid-sized business ranges from $94,250 to $175,750, according to a 2009 salary guide by California-based staffing firm Robert Half International.

B2B CFO Partners' charges can be as low as $300 and $400 a month for small companies to thousands of dollars a month for complicated jobs that require more hours, Gable said.

In addition to providing financial counseling for business clients, Gable said B2B CFO specializes in fraud detection, litigation support, exit planning, succession and estate planning. She also helps companies determine the right computer systems to install to help cut costs and is a turn-around specialist helping struggling firms recover.

Clients Gable has worked with include The Women's Exchange, The Birmingham Regional Chamber of Commerce, Collat Jewish Family Services, The Church at Brook Hills and Nutritional Supplements Corp.

Last year, Gable provided litigation support and served as an expert witness in a divorce case handled by Birmingham's Crittenden law firm. Jessica Drennan, a lawyer for the firm, said Gable reviewed financial documents and helped her client discover millions of dollars in hidden income.

"It was a complicated divorce case and with Joanie's help we were able to prove the marital estate was worth $4.5 million, which was extremely important in our case because the client was in her 60s and didn't know what was in the financial accounts," Drennan said.

Before striking it out on her own, she spent four years as CFO at Birmingham's AC3 Computers Inc. She also served as director of planning at Birmingham-based Drummond Coal.

Stephanie Rauterkus, a UAB professor of finance, said outsourcing is a great way for companies to cut costs in economic downturns. But she added it is unusual for firms to outsource top management services such as the CFO.

"This is not the same as Walmart/Sam's outsourcing their product sampling department and in turn cutting 10,000 jobs," Rauterkus said. "Those employees aren't handling sensitive information. As a member of the top management team, a CFO is in the position to make key decisions that affect the firm's mission -- maximizing owner wealth."

Rauterkus cautioned firms considering hiring an outside CFO to tread carefully. They should inquire whether that person hires him or herself out to multiple firms, and they should make sure that confidential information stays private and that there are no conflicts of interest, she said.

"I just think that both sides need to be sure that they are thinking through all of the ramifications of the situation," she said.

Gable said she does not work for competing firms and keeps all of her information confidential.

Learning to Tweet      

By Wendy Nelson

I just finished reading the book “Twitterville” by Shel Israel.  I found this book incredibly compelling.  So much so, in fact, that it prompted me to sign up for Twitter to see for myself what all the fuss is about (@wendyatwork).

While I’ve been aware of the existence of Twitter for some time, I must honestly admit that I viewed it more as a social network than a professional one, and was unaware of the value to businesses of all shapes and sizes. 

It was incredible to learn that while Starbucks was a dominant force on Twitter, with over 750k followers, a small local coffee shop could benefit too.  There were terrific examples throughout the book of how companies were joining Twitter to improve customer service, and enhance consumer loyalty to their brand.  In fact, several companies now have entire departments dedicated to Twitter. 

There were touching stories of charitable efforts and the large (and immediate) participant response.  The companies and individuals highlighted in the book were all applying a slightly different Twitter strategy, but there was a common thread of integrity, decency, generosity. 

The topics in the book were organized into logical groups.  This allowed the reader to focus on the areas of greatest personal or professional interest.  As I read, I began to form thoughts and ideas on how Twitter could be used in my own business model.  Not only did I begin the foundation for my plan, I got ideas on how to implement it and track my level of success. 

I’m the first to admit that I’m new to Twitter, and a bit intimidated.  That said I’m excited enough to listen and learn.  I believe that joining the right communities in Twitter could enable all of us to do a better job.  We will become better informed on trends and new ideas.  We will be more comfortable with, and better positioned to recommend, new technologies to our friends and associates.  We will be able to share our experiences and best practices within our communities in an effort to help others to succeed.  The possibilities are endless.

Today, however, I will settle for more moderate success.  I have joined the community and sent a few tweets.  I am following a handful of the individuals discussed in the book, and a few publications.  I even have a few followers of my own.  I have arrived.

Want to learn more?  Click here for suggestions on how to incorporate social media into your website:  http://www.socialsmallbiz.com/2010/01/24/5-tips-to-social-media-ise-your-small-business-website/

Operating a successful business in today's economic times is difficult, even for a well-managed company. Now, add the complexity of the worst recession since the Great Depression. It is no surprise that commercial bankruptcies, among the nation's more than 25 million small businesses, have increased by approximately 44% from the third quarter of 2008 to the third quarter of 2009, according to Equifax Inc. So what is a business owner to do? Avoid these SEVEN DEADLY SINS!

1. Cash Flow. "Cash flow projections are too complicated to prepare and even more complicated to understand. I don't have the time or the money to have one generated periodically." If I had to pick THE DEADLIEST SIN, this would be it. Too many business owners become so focused on generating sales or cutting costs, they lose sight of their cash. Before they know what happened, they find they can't make payroll or pay their suppliers. The business comes to a grinding halt until this problem is resolved, or it eventually becomes another bankruptcy statistic if the cash flow problem is not resolved.
2. Banking Relationships. Banking relationships are critical in both good times and in bad. Your banker needs to be treated as a Partner and not an adversary to your business. When times are good, everyone will be knocking on your door offering banking services. When you need them the most, it's critical that your banker not only understands your business, but understands you as a manager and a person. Part of this relationship is to be sure that there is a suitable line of credit in place to support your current and projected cash needs. As indicated above, you are never in a position to go to your banker when your business is about to crash. Nobody will invest in a sinking ship.
3. Employees. The greatest asset of any business is not even reflected on the financial statements. The employees are always the MVP of any organization. Treated properly and given financial incentives, a good employee will give you the best return on investment (ROI) of any other asset you may have purchased. They can increase sales, increase productivity, reduce expenses, promote and help market the company. In contrast, a bad employee can bring a company to its knees quickly.
4. Controls and Processes. Establish sufficient internal controls and procedures to protect the assets (particularly cash controls) of your business. Many small and mid-size business owners are so focused on the development and expansion of their company that they lose sight of protecting what they already have. While trusting your employees is a must, don't lose sight that there will always be a hidden worm in the apple. According to a 2008 study by the Association of Certified Fraud Examiners (ACFE), small businesses are especially vulnerable to occupational fraud. The median loss suffered by organizations with fewer than 100 employees was $200,000. If you don't have the expertise to implement policy and procedures to segregate duties and have checks and balances, spend the money to have an expert do this for you. Consider it an insurance premium that will pay royalties.
5. Customers. Spend the time and resources to better understand the needs and concerns of your customers. Years ago, the business marketplace was smaller and finding companies to provide products and services was a more regional effort than in today's environment. Customers were "forced" to accept less than top quality service because there were fewer alternatives. Today, even with small companies having larger markets through technology and a more global presence, competition among service providers has become even fiercer. The only way to retain (and grow) your customer base is to provide a product/service that meets their needs. Obviously, the first step is to truly understand their needs and adjust your business accordingly.
6. Financial Statements. Most small and mid-size business owners have started their business because they have a knowledge or expertise in their particular product or service. Unfortunately, they don't take the time to understand the financial side of their business. Every business owner must be able to read and comprehend a basic set of financial statements, including other statistical data that drives their business. These reports are the scorecard that drives the business. You need to be sure that you receive them on a timely basis and that they're 100% accurate, and you're able to analyze and digest the information.
7. Delegating and or Outsourcing. "I'm more qualified to perform most jobs in my company" OR "I can't afford to hire someone to do the administrative jobs, so I do them myself." You can't do it all. The quickest way for a business owner to drive his/her business into the ground is to spend too much time on administrative tasks. The amount of time spent on the admin functions is that much less time spent on growing the business and developing strategies. Leave the admin tasks to the administrators. It will be the best money you've ever spent.

While every business has its own personality and style, any one of the seven sins above can take a deadly toll on the future of the company. Get some religion and avoid the sins.

IMPROVE YOUR PROFITABILITY

Gross Profit (or gross margin) is a very important financial measure in almost every type of company. It is the profit from sales before administrative, sales and marketing expense, interest and other expense.

It is important to focus on Direct Margin as a component of Gross Profit: 

• Direct margin equals sales less direct costs. For a manufactured product direct cost normally includes direct labor, raw materials and subcontracted costs.  For distributors or retail this is the cost of purchasing the product for resale.  For service firms this is a bit trickier, but normally would include direct labor, materials, subcontractors, supplies and other variable costs that are directly attributable to the completion of the service.
• Gross Profit is direct margin less the cost of the operational overhead required to manufacture the product, provide the service or distribute the product.  The key word is operational overhead.  It is very important to separate operational costs from administrative expenses, sales and marketing expenses and other expenses.

Gross Profit Optimization therefore is the process of optimizing, or maximizing the profits from producing the product or service. Here are the steps:

• Identify the direct costs. Set up separate ledger codes so you can track them.  For example, most firms do not properly track labor...they put it all in one bucket.  Direct labor should only include time spent producing the product or service; all other labor should be coded to indirect labor, including breaks, vacations, holidays, PTO, seminars, training, meetings, etc.  Indirect labor is overhead and should be coded as such.
• Calculate the direct cost of each major input as a % of sales.
• Develop detailed strategies as to how to lower each of the direct costs.  Assign teams, responsibilities and timelines for achieving specific cost reduction goals.  Often the goals will be a percentage of that direct cost to sales.  If direct labor has been running 20% and materials 30% of sales, develop specific action plans to bring labor down to 18% and materials to 28%.  This will bring 4% directly to the bottom line.  Detailed labor analysis and carefully planned purchasing strategies are required to achieve these results.
• Identify direct margins down to the product line and item level.  Fix or rid the items that do not add value to the company.
• Continue to track the cost/sales % over time to monitor your results and make sure you hit your direct margin targets.
• Analyze the overhead costs (including the indirect labor) and set additional cost reduction goals for these expenses.  Tackle the big ones first.  Compare your costs with industry averages to benchmark your operations to your peers.
• Calculate the gross margin % of sales and track over time.  If you improve your direct margins and reduce your overhead, gross profit will improve.

By breaking down your margins and developing specific strategies for each category of cost, you may be able to add substantially to your bottom line!

Please contact me if you are interested in learning how to apply Gross Profit Optimization techniques to improve your company's bottom line!

I was reading my Twitter updates (Tweets) this morning and came across the following WSJ blog by Kelly Evans:

As noted yesterday, the Mid-Atlantic blizzard is likely to impact jobs reports, but the weather isn’t likely to have as large an impact on gross domestic product this quarter, which forecasting firm Macroeconomic Advisers estimates is running 3.1% at an annualized rate after 5.7% growth in the fourth quarter.

Some industries are even benefiting from a “snowstorm stimulus” of sorts. Hotels are jammed with travelers. Supermarket shelves were cleared ahead of the storm as households stocked their pantries and purchased batteries.

At Barbour Inc., a maker of heavy-duty jackets and sportswear based in Milford, N.H., “we could be doing even better right now if we had more inventory available,” says Tom Hooven, the company’s general manager. But high demand means the company hasn’t had to discount its winter gear as much, so profit margins are fatter.

The blizzard is proving a boon to some industries and a stumbling block for others. But it’s a universal headache for those trying to gauge the recovery.

As I pondered the blog, I realized that while planning is a critical function in any company, dumb luck and fate will always play a part.  In any situation, there will be winners and losers.  For an airline, a snowstorm of this magnitude can cause all sorts of problems and delays that will create days of untangling and long lasting customer satisfaction impacts.  Though the airline is helpless to control the weather, the customers may hold them emotionally accountable for missed birthday parties or vacations, or lost employment opportunities.

It is important for business owners to be prepared for any event that could impact their business, and to capitalize on opportunities as effectively as they perform damage control.  The hotels and retail stores were fortunate in this instance, but they may have done even better if they had a plan in place.  Perhaps the hotels could have offered discounts or free meals to loyal customers.  The retail stores could have made a donation to a shelter in a manner that gained them popular press during the blizzard.  Or they could have offered a special discount to their online and Twitter customers.  Moves like this would allow them to move even more inventory and generate positive customer sentiments for months to come.

It is important as a business owner to realize that your customers must come first.  Consumers have more power now than they ever have.  Word of mouth can travel the globe in minutes through text messaging, tweeting, blogs and email.  A story that may have taken days or weeks to develop a few years ago will already be old news tomorrow.  The customer sentiment, however, is longer lasting.  Never forget the importance of happy customers and you will reap the rewards associated with your actions for a long time to come.

A few steps you can take to ensure you are adequately prepared to take advantage of your environment:

• Assess the weather impacts and how they may impact your business, and have a contingency plan in place should the possible become reality
• Keep current on local events, and collaborate with complementary offerings to expand customer satisfaction
• Know what your customers are saying about your business.  Enhance or adjust your offering to meet the needs of your consumers
• Plan, plan, and then plan a little more.  It’s always better to be prepared.

February 11 is the birthday of one of America’s greatest entrepreneurs; Thomas Alva Edison.  While best know for his invention of the electric light bulb, and to a lesser extent the phonograph and motion picture,  his real legacy lies in the business arena.  Like his best friend, Henry Ford, he changed the way industrial companies operated. 

Besides founding General Electric, Edison revolutionized  the way products were developed.  His Menlo Park laboratory was the first industrial research lab.  He  integrated various scientific disciplines in a single location and combined the process of invention with mass production techniques.   By integrating teams of researchers that could focus on all aspects of his inventions, he was able to move them  rapidly from research to development to commercialization.   These concepts remain in widespread use today, in industries ranging from household goods  to pharmaceuticals.

The "Wizard of Menlo Park", as he was often referred to, left his mark on industry and humanity for generations.

Steve Jobs said it all; “A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets.”  This from a CEO whose company recently hit an all time high in stock price, in a severe recession.

The path Apple Computer took can benefit a number of small and mid sized companies who are facing a downturn and listen to the gurus that preach cost cutting as the salvation of all.  The fact is if you cut costs and downsize, how are you going to meet your competition that is taking market share from those who are pulling back?

Companies cannot cost cut their way to prosperity.  Companies prosper by providing their customers with exceptional products that customers want.  Notice I did not say demand.  It would be an unusual customer that demands a time machine, but if you could deliver one, you could not keep up with the demand.

Make an effort to do these five things:

1. Get the right team on your side.  If a sports team experienced a losing season, would they react by finding the least expensive, least experienced players?  Of course not.  So why as a business person would you want to drive away your “expensive” experienced employees and advisors, while bringing in or keeping a bunch of rookies that are going to cost you much more in the long run?
2. Promote your best products.  What are you good at delivering?  What service do you provide or product you make that is the example of what you do best?  How can you top those products?  Promote the ones you are best at delivering and the ones customers appreciate the most.  Build on them.  Apple’s I phone and tablet computer are not really all that different but one serves customers’ needs better than the other.
3. Attack in the areas where you are strong while others retreat.  The best time to exploit weakness in competitors is when they hesitate or retreat.  The best time to gain market share is when competitors show a lack of nerve in protecting it.
4. Stop waiting for the past to reappear.  I hear often “that business used to be a great money maker for us.”  By waiting for something to occur, we miss major opportunities that other more forward looking competitors understand and capitalize on.
5. Understand who pays your bills.  “Well, the customer just needs to understand that…” is not a phrase that successful people utter.

Cost cutting is a plan if you have let costs get away from you or your business model has drastically changed.  It is not a plan to grow your company or prosper without major other changes to your company.