CFOWise

How Much Do Your Employees Really Make?

Your employees make a lot more than they think they do.  The next time they complain about not taking home enough, you might want to remind them how much you are actually paying to keep them gainfully employed.

We have created a simple spreadsheet that will help you determine how much each of your employee really “earns.”  You can download this spreadsheet at Compensation Calculator.  Some are in the form of benefit programs like health insurance, and others are through statutory benefit programs like social security and medicare.  With some help from your accounting staff and/or payroll company, you should be able to complete most of the gray boxes on the spreadsheet.  Then it will figure out the rest.

Did you know that almost 30% of the average total employee costs are for the extra stuff in excess of salaries, wages, and bonuses.  Click here for a free Total Compensation Calculator.  This calculator, which is in Excel 2007 format, will show you how much of your total employee costs are going toward all of the extras.

Do you know how much you are spending, in addition to annual salaries and bonuses, you are spending on your employees?  Are you using this information to accurately forecast your expenses and cash flow in the future.  I often see this part of a company’s projections overlooked even though it is often one of the company’s largest expenses next to wages themselves.

So, the take-away is two-fold.  First, download this spreadsheet and figure out how much your employees really cost you and then use that in your planning and forecasting.  Second, use the spreadsheet to educate your employees about the total compensation package they receive because of their employment with you.  Even if they do not believe in or buy-into all of the programs and initiatives, the cost is still real – and you need to get credit for it.

Don’t Eliminate Your Full-Benefits Plan Yet

Rising health care costs and vanishing profits have led many small businesses to cut back their health care benefits to high-deductible HSA plans that cover mostly catastrophic events and not much else. Although these plans can make sense to help bolster profits in the short-term and can be popular among younger employees it can become a disadvantage to your firm when labor markets reverse and employers again need to look for competitive advantages when hiring.

An ever-growing section of the labor market has become increasingly more interested in a full-benefits package rather than the size of their paycheck. A growing segment of the workforce is looking at an increasingly distant retirement date, worried their nest egg could vanish at the appearance any medical condition that will require ongoing treatment with a hefty prescription bill to boot. There are many well-seasoned and experienced professionals willing to work for the benefits package rather than higher wages.

Hanging on to your benefits package will give you an opportunity to scoop up these valuable employees at bargain prices when hiring becomes difficult again.

Solve the Mystery of Staffing Your Accounting Department

The OPEN forum recently published my article: Solve the Mystery of Staffing Your Accounting Department.

Feedback is a Gift

About 4 years ago I was approached by a man who wanted to give me some feedback – and none of it was positive. 

The Collapse of the Entrepreneur’s Office Manager

When a business first starts, the founder is focused on getting customers.  Once that starts to happen and cash-in starts to exceed cash-out each month, the founder is quick to shed bookkeeping, cash management, and other administrative tasks to someone else.

The person hired to take all of this on quickly begins to wear many hats – receptionist, bookkeeper, accounting clerk, data entry clerk, assistant to the founder, customer service support, marketing support, human resources, sales support, and sometimes they even come in and clean the office on the weekends for a little extra money.  I have found that women are more often hired than men in this position because there seems to be an over-arching stereotype that women manage details better than men.  I neither subscribe to or deny the stereotype – I am merely acknowledging that it exists.  This person will end up with a title like office manager, meaning they handle a lot of the details no one else wants or has time for and they become a critical element of keeping the business running from an administrative stand-point.

As this person absorbs all of these activities their perceived value contribution to the business is high, although they wear so many hats and have to cover so many areas of the business that they really don’t master any of them.  In addition, they usually lack the experience and education to handle certain tasks they’re expected to do, especially when it comes to accounting and finance.

As a business progresses in its life-cycle this person does their best to keep the books in a spreadsheet or a low-cost off-the-shelf accounting software package, like QuickBooks.  While they have done their absolute best to make this effective, their lack of education and experience in accounting means that even with all their effort they are not able to provide much meaningful, timely, or accurate information/data to the people running the business.

This person becomes frustrated because they sense they are not doing enough, even though, considering the circumstances, they work long hours and care a great deal for the company.  Nobody likes a job where they feel inadequate or incompetent.  They may even try to get some training in accounting or the software package the company uses, but the training is usually so generic that it is hard to apply to the actual day-to-day operations and functions of the software in the business.

At this point the business owner is not getting the information he needs to run the business.  So he continues to trust his gut and makes far too many decisions based on the balance in his bank account instead of his actual business performance.  This leads to some bad decisions and the business struggles to grow as a result.  Yes, bad accounting can actually hinder the growth of a company!

The collapse of the Office Manager position comes as parts and pieces of the their responsibilities are peeled off and given to newly hired employees with more experience and expertise in those respective fields.  As this happens, the only work left is the low-paying duties like receptionist and data entry, and they are far over-paid for those functions.  Their position is ultimately eliminated, and very few of the people initially in the role survive with the company.  They were hired to be a “jack” of many trades, but the growth of the company has facilitated specialization and their master-of-none skills leave them without a job.

There is a way to avoid this tragedy, and I will discuss it in Solve the Mystery of Staffing Your Accounting Department on the American Express OPEN Forum.

The One-Sided Effect of Healthcare Reform

Entrepreneurs, by their very nature, are usually very skilled at figuring out how to create opportunities out of even the most dire of circumstances.  They regard health care reform no differently.

Now that the dust has settled on this new legislation and employers are waiting to see what else transpires between now and 2014, let me shed a little perspective on how small business owners and entrepreneurs are planning to comply with the reforms.  Interestingly, the people that will feel the brunt of this impact are the employees, not the employers.

OVER 50 EMPLOYEES

Businesses with over 50 employees will be subject to a penalty of over $2,000 per year for not covering their employees.  This is steep, and amounts to a 5% increase in labor costs for an employee that makes $40,000/year.  In a recession in which double-digit percent margins have almost become extinct, how will these businesses survive such an increase?

The answer is quite simple.  The objective is to render the increased health care costs neutral to the firm’s overall labor cost structure.  I have heard many employers that will be impacted by this explain that it will have to be the employees who pay for it, primarily through wage and other benefit decreases.  So, it ultimately comes out of the employee’s pocket, not the employer.

UNDER 50 EMPLOYEES

Although businesses with fewer than 50 employees will not be subject to a penalty in 2014, they will be eligible for significant tax credits for covering their employees with health insurance.  Certainly the tax credits pale in their monetary benefit when compared to the cost for small employers to cover their employees, which means the business owners and entrepreneurs will figure out how to make the employees pay for at least the difference.

ONE-SIDED EFFECT

My point is that the average hard-working American will pay for this health care reform, not businesses.  We will see wages and other benefits decrease to offset the costs of health care.  I doubt this is the result legislators wanted, but it will certainly be the reality.

WILL PUTTING THE BURDEN ON EMPLOYERS WORK?

There are two common reasons these employers are not offering health insurance.  First, their industry’s business model does not have enough room in it.  Second, the employees do not value health insurance offerings from their employers.

By forcing employers who have operated their businesses without offering health care to their employees, this legislation is trying to tinker with proven business models and employee compensation packages that were not broken.  As we approach 2014, most businesses will prepare for implementing health care reform by “tweaking” their overall compensation programs to create a zero-sum result for the company rather than trying to absorb the costs into their business model with no additional value perceived by their employees.

Why the Economy will Rebound Faster than Employment

I have seen it happen over and over again.  Entrepreneurs and business owners hire people and then they grow to like them.  They build a culture of family and they genuinely feel a sense of pride in and responsibility for providing employment and security for so many families.

Then, when times get tough, they struggle to let people go because of this same sense of pride and responsibility.  These same entrepreneurs don’t hesitate to sell equipment, downsize their office, or cut other non-human expenses.  So why can’t they just look at their employees as an asset or a piece of equipment to sell or dispose of when they need to lean-up their operations?

I know, this question sounds silly.  Obviously we don’t build much of a real relationship with a piece of equipment, and we don’t personally know of a wife and five kids that the piece of equipment is trying to support.  So, what does this have to do with our ongoing high levels of unemployment in this country?

We have all heard the statistic from the SBA that that just over half of private employees are employed by small businesses.  And I would argue that the small businesses are those that have more of a tendency to view their employees as real people and real families – in fact, sometimes a good portion of their employees are family members.  In this context, I submit that owners and executives of the small businesses of America are still wounded from having to let people go during the recession.

Where a few years ago it was common to see entrepreneurs hire a new person at even the prospect of the need, these same entrepreneurs, still bruised from some tough times, are much more hesitant to pull the trigger on new hires.  Phrases like: “Let’s hold off on hiring until we are absolutely certain we need another person,” and “I’m fine to authorize overtime until we can really justify adding to the staff,” have become the new norm.

Even though the Business Outlook Survey published in CFO Magazine is predicting double-digit rates of growth in both earnings and capital spending over the next 12 months, it is also predicting much slower employment growth.  When asked why employment would lag behind other positive trends, two of the top three responses highlighted the reliance on :

- 44% plan to increase productivity per employee

- 37% will increase production efficiency

Entrepreneurs are simply asking for more from their current employees and looking to technology and automation to grow.  They learned their lesson and, as a result, are accelerating our economy’s change to a more efficient playing field, relying on people to add high-level value than fulfill lower-level tasks.

So, as the economy rebounds, it only makes sense that employment will lag behind.

Grow with People or Technology – an Entrepreneur’s Dilemma

Two different companies, each in a different industry, face the same dilemma.  Growth and success have created significant pressure on their business, specifically their people and their technology.  In order to solve the short-term constraints as well as build the most scalable solution for the long-term, how much investment should be made into new technology and how much should be made in people, or human assets?  

Both companies have found a shortage of “off-the-shelf” software to solve their technology needs, so they have built powerful databases and other platforms from which they run their business.  It seems that many entrepreneurs under 40 have the attitude that they should hire a full-time programmer and build their systems from scratch, which often ends up much more affordable in the short-term.  The spirit of bootstrapping is alive and well, even in young entrepreneurs.

The challenge, however, with this scenario is what happens after a year or two.  In both situations, the customized solution has already become antiquated and the company is beholden to the developer who, after some analysis, used non-traditional coding and programming language that is difficult to comprehend and unwind.  These developers often become a little lazy and create shortcuts and work-arounds that begin to rear an ugly head in the most inopportune moments.  What worked in the short-term may not be the viable long-term solution.  At CFO WISE, we have found this to commonly be the case.

Both companies are very conservative in their hiring practices, careful not to over-staff their operations.  Yet failing technology systems put so much pressure on their staff that the entrepreneurs begin to hear things like: “I’m going home at night and on the weekend and working several extra hours each day remotely to try and keep up.  We need to hire more people or I’m going to burn out.”  Often we hire more people to keep our staff happy, but we are actually perpetuating the problem created by insufficient technology.

I tend to operate under the following two premises when it comes to people and technology in a business.  First, use technology to automate as much of the business as possible so that the company can focus on hiring bright, smart, talented employees to help the company grow.  Second, do not buy or implement technology to solve your problems – your employees need to solve the problems first, then you can purchase and implement technology to automate the solutions they develop.  Each of these is worthy of a separate blog of their own, but we’ll let this serve as the basis whereby we approach this dilemma.

Obviously the answer to this dilemma will differ with each situation, but I challenge all entrepreneurs to think hard about the investment they are making into people and technology.  If we are confident that your technology can support the next five to ten years of growth in terms of scalability and relevance, then we are in a fantastic position.  If we are not confident in this and we are just doing the necessary things to “band-aid” our way through each day, month, and year, then ultimately we will probably have to scrap that system and start all over again, anyway.  And we’ll spend a lot of money on people trying to hold it all together in this process.  We should seriously consider getting it right the first time if at all possible.

In addition, we need to strongly consider which operations performed by employees could be automated, and we need to start down the road of automating those functions.  Our competitors are going to do it, and we will need to eventually, as well.  For almost 2 years I put myself through college in a call center for one of the largest investment companies in the world.  At the time, automated telephone systems were becoming popular and many of my co-workers thought they would lose their jobs to automation.  Not only was this not true, but we also found that instead of wasting our time answering questions and resolving concerns that the automated systems could handle we could focus on the more value-added elements of the company’s service mission.  The point – our knowledge worker society will progress only as fast as we automate the simple stuff and add more value to our customers with our human assets.

Staffing Accounting/Finance Department from Start-up to Medium-Sized Company

I have had a lot of conversations recently about staffing the accounting and finance function in the company.  As companies grow and shrink, their needs in this area change.  We certainly do not want to be over-staffed, and we also want the most cost-effective staff doing as much of the work as possible.  For example, we typically do not want our Controller or CFO entering payables – this task can easily be delegated to a much lower cost employee.

This is a simplified organization chart of the different accounting and finance functions in an organization.  The reality is that most start-up and emerging companies cannot afford all of these positions.  My purpose in this post is to explain how to fulfill all of these necessary functions throughout the life-cycle of a start-up company.  I am making the assumption that we all understand the purpose of the accounting/finance function as well as the assumption that the company has or will hire the appropriate outside professional(s), like a tax CPA, to help the company remain compliant.

Even at the earliest stages of a start-up, it is usually best to hire a part-time bookkeeper to fulfill all of the roles listed above.  They usually do not have the expertise of a high-level controller of CFO, and they will be slightly over-paid for doing some of the more clerical tasks.  But the bookkeeper gives an affordable and flexible option to start-ups.

As the company grows and has revenue, the company should begin to look to hire full-time clerical staff to handle most of the AR, AP, and payroll tasks while the bookkeeper remains part-time and delegates everything they possibly can to the in-house staff.  One of the major challenges that usually emerges during this process is that the part-time bookkeeper will begin to struggle to keep up, especially with the monthly financial statement preparation and analysis as well as other management reports on how the business is doing and what improvements should be made to maximize cash flow.

Often the next best step is for the company to consider engaging the services of a part-time CFO.  This individual will be a strategic direction to this department and may only be needed about a half-of-a-day per month.  As the company continues to grow, the part-time bookkeeper will need to be replaced by a full-time Controller or Accounting Manager.  All of the full-time accounting staff will report to this person.  In addition, this position will take direction from the CFO. 

The last full-time hire should be to fill the position of CFO.  Often companies can do very well leaning on the part-time CFO services to exceed $50 or even $75 million in annual sales.

Written by Kenneth Kaufman at CFO wise

One Massive Layoff, or Slowly Let People Go?

I was asked this question today, and I think it deserves a little bit of discussion.  I will share my take on the subject, and then share the opinions I received from several of my friends on Twitter.  Feel free to add your comments.

Let me come straight out with my main opinion – any excuse to not take care of the layoff all at once is covering selfish motives.  Either we don’t want to hurt someone’s feelings, we don’t want to face the music, we don’t want to be the “bad” guy, or we are just scared or a bit cowardice.  If the layoff is what the business needs, then it has to be done – period.  Not doing it all at once will cost the firm money and could put everyone who is left in jeopardy as well.

I recently heard an entrepreneur needing to do a layoff say that he would reduce everyone’s wages (instead of doing a layoff) and wait for certain people to quit.  I have two issues with this – first, this entrepreneur is a coward who is afraid to confront his people with the truth, especially the ones he wants to let go.  Second, if I were a betting man, I would bet that the employees he wants to leave will stay and his star players will leave.

I posed this question on Twitter and here are the replies from folks from all walks of life (just a quick reminder that Twitter only allows responses in 140 total characters or less, so please appreciate the abbreviations and brevity:

@GoodGrapes – Go massive if that’s what it really needs – cut deep, then re-group and move on.

@jeremyhanks – Layoff all at once if u at all can. Get the shock through the system, people hate change, slowly might get u into the death spiral.

@MaritaR – Better putting things to an awful end than to perpetuate an awful time – massive layoff sadly better than a long time uncertainty.

@IFRS exorcist - To avoid uncertainty and negative morale if you know who you are going to lay off it is better done all at once.  Just my opinion.

@LearnSolMary – If must lay off, get it over with & move on so wound can heal. Wd ask client to be absolutely sure layoffs are the only way.

@virtualcfo – One cut and let the remaining employees now that they are ok . If not, moral and productivity will be hurt while waiting for the ax.

@VAinParadise – IMO Massive layoff and get it over with. When done is spurts it puts unnecessary stress on everyone and kills moral/production.

3 Rules every Family Business Should Live By

If you own or operate a family business, you should consider living by the following three rules, in order to have financial help for small business as you carefully try to lead your company:

RULE #1 – NEVER HIRE FAMILY. OK, I know you have to hire family because it is the family business. But if you have to, hire them like you would anyone else. Interview them and make them go through the hiring process just like any other employee. Hire them into a position they deserve because of their background, education, experience, and ability. Failure to follow these simple but very often disregarded guidelines result in overpaid and under-productive family employees and frustrated and sometimes disgruntled non-family employees.

RULE #2 – NEVER PROMOTE FAMILY. Yes, it is actually OK to promote your family, but you better only promote them if they deserve it. Being related to you does not merit their promotion just as not being related to you merits anyone else’s promotion. You will lose your best employees if you do not approach this with great care and concern.

RULE #3 – NEVER FIRE FAMILY – If you would have obeyed rule #1, this never would have been an issue. If times are tough, everybody knows that family will be the last to go, or will they? A well run family business will leave family out of the equation in its evaluation of and overall contribution from each employee. I have seen family businesses lay off their own flesh and blood, and the business was always better off for it.

The underlying theme is this – try and treat everyone, even family members, equally and fairly.

Is your Business Ready for a Part-Time CFO?

Great article on my industry. It’s always nice to be validated by the traditional media.

Please contact me if you have any questions about if your company is ready for a part-time CFO. Thanks.

Winning Sometimes Means Quitting

Successful people quit all the time, they just quit the right things at the right times, according to an article written by Tim Berry.

I have long preached that everyone needs to stick with their core competency and not stray from the things that made them successful. This is not just a nice idea I espouse – I have seen dozens of successful people stray from their core competency and almost lose everything.

If you are good at making widgets, then please be careful if you decide to build a commercial building with the idea that you will use some of the space and then lease the rest. If you can earn a great living as an attorney, you may want to consider resisting the temptation to buy a struggling company thinking you can turn it around. These  often consume huge amounts of time and cash, and they never had the promise of being anything worthwhile anyway.

 Yet for some reason our human nature allows us to risk everything by diverting our attention away from what we do best, for example my CFO Career. The point is this – stick to your core competency, and sustainable success will follow. Surround yourself with people who have different core competencies than you, and you could potentially build something greater than you ever imagined.

In these difficult economic times, many of these side projects are getting out of control. Quitting them is often the best option. So are you a failure if you quit? Go ahead and quit, focus on getting even better at your core competency over the next 10 years, and then let’s see how you answer the questions. My guess is you will long have forgotten about these other things and you will have found more success than you know what to do with. Those who focus will thrive.

Hiring & Use of Independent Contractors Is Up, But Wages Are Down

No surprise here – In 2008, Small to Medium Businesses (SMBs) increased hiring, decreased salaries, and stepped-up their use of independent contractors and business financial consultants according to SurePayroll’s Business Scorecard as reported in this ARTICLE: eweek.com

 All these stats do is validate what we have all expected. The SMBs are and will continue to grow, so they are hiring more. And, since unemployment is so high, SMBs are paying less for the same or better talent.

The most interesting development in the SMB market is the increase in utilization of independent contracts, up 8.3% in 2008 to its highest level since 2004. Not only are SMBs trying to save money and avoid a full-time commitment, but the softening labor market has also encouraged the workforce to be more creative with the structure of their employment relationship. In short, many in the workforce are taking part-time CFO work as contractors to at least have some income.

 The reality is this – SMBs are going to drive us out of this recession, and the smart ones are gobbling up the talent and saving money along the way!

Part-time Work and Unemployment

According to the USA TODAY, 7.3 million people are working part-time but want to be full-time. These people do not count in the unemployment rate, which was up to 6.7% in November, its highest level in 15 years. On expert predicts unemployment will peak at 9% around the end of 2009. This information can offer some unique opportinties to owners and operators of start-up, emerging, and medium-sized companies. All of the large employers around the world cannot avoid the negative impacts of our recession. They are laying off the largest number of employees, by far. Many small and medium-sized companies are not onlu holding their own, but they are GROWING in these difficult economic times. Just like any other business, quality employees are essential to their profitable growth.

We are in an employer’s market when it comes to jobs.  There are and will continue to be quality employees looking for work with a finite amount of jobs to find. As such, these quality employees are taking lower wages and less-accomadting work environments than before – when we were in an employee’s market. Smart businesses recognize this trend and are taking advantage of the employer’s market.