Business Management zone

FD's Diary: Owner mismanagement

November 27 – Read a survey this morning that showed that FTSE FDs rarely have to make do with less than £250,000 a year and some have salary packages in excess of the turnover of most of our trading divisions. I don’t think this is news I’ll be broadcasting at home.

But I did have to broadcast the fact that the ops director wants me to visit a supplier with him tomorrow. The trouble is, the supplier is in Germany and apparently it’s an annual bash always organised on a Friday so that no one has to go to work the next day. Which is, I think, no comfort for those who have to get on a plane.

So why am I going? Well, exchange rates are always an issue apparently and France and Germany have done their best to make things awkward this week. As a result I find myself flying with el-cheapo airlines at some silly hour tomorrow morning so that I can negotiate for us in my school boy German. And having to explain to Mrs FD that I am really not trying to duck out of the weekend’s planned Christmas shopping trip – honestly.

Actually, why I really think it is worth going is to spend more time talking about just what is going on here. For a start, when I asked the FD why he didn’t take the CEO he said Mrs CEO didn’t trust him on such trips. And when I jokingly asked why he didn’t take her instead he said it was because the CEO didn’t trust her on such trips…..

Who wants to work for an owner mismanaged company?

* * *

November 26 – I’m beginning to feel I shouldn’t put my head above the parapet. As soon as I begin to discuss things with people they begin to dump their problems on me.

Yesterday got bogged down in another head scratching session which spilled over into this morning. The sales manager has the job of doing the sales budget. So I just modestly challenged him on why we price for our service offering the way we do.

That division has several depots and covers much of the UK. The actual service time required at a site when we get there is quite low – although for some sites regular visiting is essential. And we charge by the number of units we check at each site when we get there, which can be anything from 1 to 20. But as I pointed out, that’s just daft. Because if we only spend a minute or two on each one (assuming all is well, as it often is) then to charge for one or two items when it’s taken 30 minutes to get there is daft. We have to have a charge just for turning up as a minimum (which must really cover travel time) and a falling scale of charges per unit checked on site to encourage extra product sales for the division that supplies the units we service.

Well it seemed obvious to me. But it’s taken a massive amount of time to persuade people that the real cost we have is not doing the job, it’s getting to it and what we should be doing when selling is maximising geographic concentrations as “person in front of unit on site time” is what gives us maximum revenue, and not getting as many units out there as possible, wherever they might be.

The only saving grace of these couple of days has been to see our tree fern specialist file more paper and tidy more office space than I would ever have thought imaginable. In fact I was so worried at the speed I asked #3 to see if she could find some things, just in case, and she could. Now I have two people I could clone.

Which, however, leaves me worried about #4. There’s something up with her.

* * *

November 24 – Diaries should be written late in the day. But not this late!

WIP has been my concern. We have it. Badly. But no one quite knows the cause of it or how to cure it, or so it would seem.

The trouble is we make a lot of our product. And as I’ve previously confessed, it has a long production lead time and a relatively short shelf life. During that production process it will change state a number of times – almost entirely due to the application of labour, the cost of none of which with regard to any one unit of production will be material, but which in aggregate it is. And once we get it into stock its either worth something because we can flog it almost straight away, or not at all.

How does this affect the accounts? Enough to be material (to use my long last audit jargon). But not enough to justify tracking each product through production (I assure you). So the ops director and I sat down and tried to work out a formulaic answer to this because all that has gone before seems inappropriate.

This formula goes something like this. We know that we could source what we make from third parties. We don’t for quality reasons. But it means we can prove purchased market value at the time an item moves into stock. And we know what margins we make so we can knock them off. After which if we know our attributable raw material cost and the approximate rate of application of labour over several months to each unit of production, then why not just time apportion labour (adjusted for overheads) to units by volume to increase from raw material cost to alternative market price less profit at time of transfer to stock as the basis of WIP value at any stage?

Have you got that? I hope the auditors do, because I think we almost convinced ourselves this would work.

* * *

November 21 - Much of life works on the basis of being able to do someone a favour. My mate the ops director has a young woman on a short-term contract based here who he should really be letting go of right now because her project has run its course and a new one will not be starting until the spring. But he wants to keep her since for some reason as a Kiwi with a PhD in tree ferns (or something as obscure as that) she's been happy working on our product delivery, which as far as we can all tell underuses just about every one of the skills she has to offer, not the least being her charm and wit.

Now, I need a credit controller. And whilst she's never done any she could, with her skills and adaptability, cover an almighty lot of admin tasks inside my department which will when let me release #4 and #5 to tackle varying parts of this task.

So apart from the fact that she's cheap, an absolute pleasure to work with, and willing, I’m also doing the ops director a favour by taking her on. Happy to oblige, I say.

* * *

November 20 – There are days when you don’t seem to get anywhere.

You set out with high hopes, even with a list of objectives (well, a pile of post it notes and Outlook reminders anyway). And none of them get done.

Sure you help people reconcile ghastly sales ledger accounts in the quest to recover cash.

And you deal with the irate supplier who has clearly got a fair point about why we haven’t paid because I can’t see what we’re disputing about his invoice.

And you wonder why someone has coded a pile of what are obviously fixed assets to repairs and go in search of answers.

But does any of that take any of your objectives forward? No, not one iota.

And now you know what sort of day I had yesterday, apart from my meeting with the sales manager. And today looks like it is going the same way...

* * *

November 19 - I was right, but is there any satisfaction in that?

The sales manager has been to see me. And the CEO has dumped the entire job of doing the sales budget on him. I like the sales manager. But he has one real problem. He started off on one of our vans and has worked up through the ranks. That's to his credit. The down side is no one has given him any training on the way.

Now rising through the ranks is to his credit. But no one should reach a position of real responsibility, in my opinion, without having worked for several organisations so that they can filter the good, the bad and the ugly out of what they have learned. He simply has not had that chance. The result is he thinks that what we do is the only way of doing things. Mind you he's frustrated enough to realise that there must be more to the job than he knows.

So, I've discussed the whole issue with him. And he's enthused. And I took the chance to drag in the ops director to the meeting. Why? Because the moment we've agreed the sales budget he's got to agree the ops budget for the cost of supply of the chosen product mix. I'd have thought this was obvious - but it seems it is not. So, it was worth while getting him involved.

The only trouble of all this is it's good fun, but it doesn't take forward my objectives. Losing #2 was a plus in terms of clearing obstacles to progress. But it's clear he knew things that just weren’t systematised, particularly with regard to credit control that are now rebounding on us. #3 remains clonable, and #4 seems willing to do anything to keep me happy, but neither knows enough to recover debt from a database on which we just do not have enough information to chase the right people. I have to deliver cash flow to make everything work. And right now that is my pressing, short-term, problem. I haven’t yet recruited that new credit controller. Perhaps I should get on with it.

* * *

18 November – We covered more than the sales budget at the Board Meeting.

Whilst she was with us Mrs CEO gave attention to the loos. And we’ve got the go ahead to take one quote forward, subject to the HR department’s approval of the taps and other fittings.

More importantly, discussion of software licences and the lack of a policy on IT buying, at least in part exposed by my new machine, means that it’s been agreed that the IT guy will move under my management now, not ops (you could see the ops director’s relief when I said OK).

And, as importantly, we all agreed that the IT guy’s giving out the early warning noises about wanting to leave. Which means now is the time to start looking for new IT support. And that’s down to me too. But I’d rather it that way.

Why then am I not so sure all will work out well? Maybe it’s the mail I’ve got from the sales manager saying he’d like a meeting. What’s the betting the CEO has delegated the entire sales budget to him and I’ve now got to give the tutorial again? Answers on the back of a used £5 note please to The FD...

* * *

November 17 – Board meetings should be short. Tutorials can, however, be somewhat longer. And that’s what Friday turned into.

I hadn’t really prepared myself to do a day’s training. But I hope it was worth it. Because I felt like I was teaching the CEO to do his job. I’m no sales manager, but at least I’ve worked with some good ones. So when it became clear that the CEO thought that setting a sales budget was a matter of saying “I think we should do 10% more next year” I tried to gently persuade him there was more to it than that.

So I asked things like what price rises he planned. And what changes in the product mix there would be. And how the discount structure was going to be reviewed since I’ve gathered one of our competitors is getting pretty aggressive on this. And where we can afford to match them, because it’s increasingly clear to me that on some of our geographically far flung stuff we can’t be making money already, so we can only give discounts in areas where we’re already concentrated so that price reductions are matched by productivity gains in distribution. And so on. Which means there’s an awful lot to do before we get to a sales budget as yet, because none of this has been thought about.

After that I also had to gently suggest that I’d need a budget for the costs of doing all this. Marketing costs plus 10% does not mean sales plus 10%, but you’d think otherwise from the initial reaction here. So I had to ask who was managing what accounts, what their targets are, when they are to fulfill them and how they are to be incentivised. And, of course, what we were going to spend cash on to help them achieve these aims. Which means marketing costs will have to cover more than the golf club fees. So, again there’s a lot to do.

And for all this I thank a couple of excellent sales managers I’ve worked with in the past. Because they taught me how to do this.

What’s my concern now? Well, actually that I’ll end up doing this anyway. But I can live in hope.

* * *

November 13 – Got the accounts out. But it’s clear that when we talk about the budget tomorrow we have also to talk about basic controls inside a product-based business.

If sales have no clue what they think they might sell, there’s a lead time on product supply and a limited shelf life (and we have all three situations here) then stock wastage is about as certain as death and taxation.

Our margins are up the shoot compared to previous years, the budget (which admittedly was a joke) and what I’m beginning to learn of our competitors. In a tough market we haven’t got the luxury of doing this. But it does give me a drum to bang on about on Friday.

The point I have to make to keep my new ally, the ops director, with me is that it’s sales department’s fault. And that’s the CEO’s responsibility. That should go down like a ton of bricks.

So should another thing we’ve found. I’ve not yet won the argument about paying monthly wages on 1/12 salary. Nor come to that paying basic pay on that basis for the “workers” with only overtime by the hour. But in a review of the payroll #3 has been doing for me we’ve found successive patterns of overpayment. Why? Because annual salaries have been converted to hours and then rounded up to the nearest penny. And then they’re multiplied up again when wages are calculated, and rounded up, and so on. The outcome? Several thousand pounds of overpaid wages in the year in total. Not much to any one person, but when gross margins are under threat all wasted money. The good thing is it gives me an example of what we’re doing in accounts to save cost – if others help us.

Oh I can tell I’m going to be popular on Friday.

* * *

November 12 - Time to buy that computer.

Sat down with the IT chap this morning and agreed what we’ll do. First of all we’ll drop the local box builder who has supplied quite a lot of our kit in the past. He’s now got one dominant customer and we’re not getting the service we want. So we have to look elsewhere.

Second, although no one ever got sacked for buying Dell my experience is not good with them in past companies. I know there are those who swear otherwise but I recall a portable which would not reboot on the reboot button and which they swore had a software problem which needed a patch (duly applied) which did not work and which they never would deal with until eventually it was just dumped in a corner. So we’re not going to Dell.

And after some calls to mates I’ve decided to try Evesham. What’s in their boxes looks like pretty standard stuff. But what everyone tells me is that they are great on support. If it can’t be done over the phone, then they turn up, when they say. That’s what I want. So we’ll buy one, hope it goes wrong and see!

What did I settle for? We thought we’d carry on the innovation, so it’s going to have an AMD 2600 chip – fast enough and been around enough to work well with 512mb DDR ram. And a bit cheaper than Intel. I could not, however hard I tried, bring myself to have a portable so it’s a nice proper box that will sit under my desk, with a 17” flat screen and cordless mouse and keyboard above (I didn’t change my mind in spite of all the doom mongers saying these don’t last – I’ll keep you posted). The graphics card is decidedly modest – but I don’t play games, so who cares? And I have nice things like CDRW etc on board as this saves time I find. Oh, plus XP professional and the full version of XP. Yes, I know that this should all be consistent system wide– but there are bits we just don’t need universally which I’d like – so I’ll have them locally. I’m assured that it’s got all the bits for the network – I leave that to others.

And the price and service on ordering was good.

And the plus is that because it’s cheaper than a portable I’m planning to use the difference to look at a good PDA and see if they have a use here. Oh it’s fun to be able to code things to IT R & D!

* * *

11 November – You can feel the shock waves rippling through the company at the thought they might have to think about the budget.

There’s an almost palpable wave of panic.

But it’s been agreed that this should be the focus of the board meeting. Which is what I wanted.

* * *

November 10 ! – Came in with a spring in my step. And I was even surprised to find that Mrs CEO had issued an agenda in anticipation of Friday’s board meeting – which I requested at the last one. It’s always pleasing to find you’ve been heard.

Less inspired to see what was on there – more total drivel which is not about core business activity. Final arrangements for the Christmas bash are not a board item!

The key things we need to discuss, were of course, not there. And it being mid November, and with our year end being 29 February next year (who, for heaven’s sake chooses a February year end?) I thought I’d shoot off a mail saying I thought almost the entire meeting should be dedicated to our budget objectives for next year. And not to miss a point I listed what I thought we should consider, almost all of which made clear that the budget is not an accounting issue, but an operational one. That should make Friday a long day, especially as I’ve also managed (with some effort) to get two quotes for the loos and they’re bound to take up the rest of the time available.

In which case I can relax a little on some of the nit picking issues on the draft accounts I’m trying to get out (post strikes permitting – it doesn’t half up your accruals!) and which show a worrying problem with gross profit rates over more than one division. Off to see the ops director on that one. He also needs to realise accounts raise questions which need answers if we’re going to build a successful relationship.

None of which suggests I’ll finish my musings on the new computer today with our IT guy. Oh well, there’s always tomorrow.

* * *

November 7 - Some people are tolerable. Some people are a delight. And some are just plain objectionable.

The CEO thinks he's a delight. You can guess what I think. But the good thing is he's so vain you can work him into your way of thinking quite easily.

There is only one thing that really worries him. It's cash. Profit, and absolutely anything else, is quite irrelevant (or so it would seem) so long as he has enough cash to keep Mrs CEO and the lesser EOs in the style to which they become accustomed. The business's need for cash is quite secondary.

But the good thing was that I'd done the cash flow, and so could show that things will be going OK in that direction since the efforts we've already begun on credit control look likely to yield some early results (alongside the recognition of some bad debt). So all I had to do was show (again) that all the issues I'd found cost less cash than getting rid of #2 saved and improving credit control would bring in and he was my man.

But I went out with the ops director afterwards to discuss this. It's clear that the CEO is a joke and the ops director is running this show. So he and I have agreed to work together to keep the show on the road. For a week that started on a low this left me feeling it may not be so bad after all. One can live in hope.

* * *

November 6 - The paper on software licences woke up the CEO. He's suggesting all I've done since I got here is moan, cause trouble, find problems and cost money.

That seems about right.

I asked to meet him. You'd think this would be easy - but he's always on a course. A golf course, that is. But in view of the need to stem costs he can fit me in tomorrow he says. Since I've wanted to nail him down for ages I think it was worth upsetting him. Perhaps I should do it more often.

* * *

November 5 - And it looks like the day will go with a bang. #2 has signed the compromise agreement so that coup is complete.

But the IT guy has also reported that as far as he can work out we're short of licences for some software, and no one knows where the licences we've paid for are. I guess I'll have to take this one to the board, but as the IT guy is more than up to the task and wrote me a good paper on just where we are all I'm going to do is forward it. And give him a vote of thanks.

* * *

4 November - Too much advice! You post an innocent comment on machines on the web via what happens? All your ideas about the ideal PC go out of the window.

Now I've got to look at docking devices and where to put them if I really want my desk back (because they seem to conflict with that).

And I'm duty bound to look at cheap options now I know they're available. And local assemblers as well as national suppliers. The list goes on.

And I even have to think about such things as whether I must have a notebook to justify why I need my own local drives and so on - instead of just relying on the server.

Why is nothing simple?

* * *

3 November - Another month end. Another round of statements to print and not dare to send until we can be sure that we have reconciled the accounts on which we're having problems. Another round of people saying we have not paid at the end of the month following their invoice (even though that's our policy). Another chance to get that spreadsheet that passes for management accounts right. Most importantly, time to have a detailed look at cash flow. I know this should be an all month job - but I always do it as early as I can in the month to give myself the satisfaction that e will at least get through to the next one.

When I started I had higher expectations than that. This job is already getting to me.

Within six weeks of taking on the new job, FD overhauled the company's invoicing processes - and made his #2 redundant. October's FD Diary was full of drama.

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