Knowing When You Need More Help

Every business goes through growing pains. These times are good and bad for a number of reasons. Let us look at some of the decision making process necessary for deciding on the addition of more employees.

Usually it all begins with a one person or partnership company that finally breaks over the top. They suddenly come to the conclusion that they can’t meet the demands of their customers fast enough. This problem, as wonderful as it may appear, results in two possibilities, expansion or competition. Expansion should be seen as a good thing but more often then not it is feared and competition is allowed to flourish.

I realize that this is a rather simplistic view of competition but it is one of the contributing factors. If we can get a handle on this part of the game we can effectively grow our business. Failure to deal with the various parts of competition may end in a reduction of business or an over supply in the market place.

Most of us who have been in our own business can clearly remember the moment where we seemed to be working around the clock. We seemed to lose our creative energy and are caught in an endless production cycle with no innovation. We seem to lose some of the love that got us into business in the first place. Usually our first employee decision is hiring a family member. Many business owners will tell you this was the first bad decision that might have destroyed the company. I don’t have anything against family members but the lack of separation between family and business can be more tiring then the business itself. There are many advantages to hiring family but establishing a line between business and family is vital. Clear agreement on authority and direction needs to be firmly established before the hire. Don’t let a strong family member destroy your dream. Take charge of the situation and clearly define the help you want or need. Just because they are family, doesn’t mean you have to be a rug.

Finding the right employee is a daunting challenge but knowing you truly are ready is just as important. The big question is, “How do you know you have enough work to warrant another employee?” This question needs to seriously look at the cost of an employee verses the cost of not hiring.

The first most obvious cost is the amount of overtime you are paying current employees. Why would you pay someone 1.5 times their going rate when you don’t get any more for the extra expense? Sooner or later the cost of overtime will balance the hire. If you are paying for twenty hours of overtime a week that could be absorbed by a new employee, then you have three fourths of their wage covered. Let us not forget the reduced stress on your current employees that will help your business. We also need to consider the potential increased production time available.

I realize that a new hire will not be up to speed for a while but let us not forget the extra 10 hours for learning and ultimately business growth. There is some risk here, but the rewards are substantial. We are giving our business room to grow. We have to make a decision to invest in future growth.

Some people will wait until their full hours can be recovered. The expectations placed on the new hire become too high at this point. It is doubtful that any business can expect someone to walk in and do the full complement of their duty from minute one. Smart money would allow for growth and the learning curve. Let us not forget that you or one of your key employees will need to train this individual and this will take extra time. Once again, I stress the importance of investing in the future. We don’t want to take on too much risk. Play it smart and allow a little wiggle room. Patience and reasonability will make the choice a success and will garner a happy successful employee.

Originally posted 9/18/2006

The Minimum Wage Increase Passed the House

I couldn't help myself. I had to have at this topic one more time. (supporting Article)
Everyone seems to banter the Minimum wage around like it has no cause and effect. They seem to think that raising it will solve all the woes of the low earner. Somehow this extra money is going to make all their problems go away. I'm going to try real hard to not repeat what I wrote below in "Minimum Wage Comes Up Again", but I have to point out a few more issues.

By raising the minimum wage it does a lot more then just put more money in the workers pocket. Let's look at what other financial areas it also effects.
Workers Comp
Social Security
Medicare
State Unemployment
Federal Unemployment
Transit Taxes
Municipal Taxes
I delved into this when I wrote "How to Understand Price Structure in Business". A simple wage increase as they like to put it has many more factors and complexities then what we are hearing in the news.

Workers Comp -- Since this is based off of the earnings of the employee, raising those earnings raises the expense. Depending on the job you do a risk factor is calculated and a cost per $100 earned is payed by the company. The risk factor has its bases in the number of injuries and their cost industry wide. The company you work for is also rated based on previous injuries and what programs they have in place to minimize exposure to risk.
Social Security and Medicare -- I know the government is trying to find ways to fund these slowly bankrupting programs, but is this the way to go about it? Both of these taxes are employer matched. That means that the increase will be a double benefit to these programs. I realize that we are only talking about thirty cents an hour, but there are a lot of people out there. If I could make an extra $2.50 a day off of every person that makes minimum wage in America I could make Bill Gates look poor.
State & Federal Unemployment -- Another hidden tax that the employees don't see yet a substantial burden on business. Once again it is based on employee income and since they can force that upward so they force the extra expense on the employer.
Transit & Municipal Taxes -- Well it looks like they will be getting a raise soon. That's right they are also tied to the wages paid by business. Another hidden tax the employee is completely oblivious to that the employer knows all to well. You would be hard pressed to find a community satisfied with how these two entities spend their money and now they are looking at a raise to further add insult to injury.
Once again, this is not a simple issue. Instead of focusing on the minimum wage, why not focus on why people are stuck there? What keeps them from moving up the wage scale? Are they too stupid? ...too Lazy? ... too smelly? ...too irritating? What is it? Perhaps our welfare system makes it far to easy to simply stay on the dole? Why work when you can get it all for free?
I'm tired of carrying this load on my back. I bet a few of you reading this have noticed that your load feels a little heavier. You best drop a line to your senator and put the brakes on this whole thing or all of us are going to feel it even more.
Hey, can I get a .01% tax on all those who are too stupid to rise above the minimum wage? It would only be about two cents a week. They wouldn't even notice it.

Originally posted 7/29/2006

The Minimum Wage Comes Up Again

This issue drives me crazy. (I am working from an article found here.)

Now they want to raise it from $5.15 to $7.25, that is over a 40% increase. I don't know about you but most of the people I know have actually taken a pay cut over the last five years. Yeah, I know some of you have been getting a bit of it back due to the good economy but few have actually recovered back to the level before the cut. Yet I digress. Let's get back to the topic at hand. I have actually covered this issue fully in a previous post titled "The Minimum Wage Isn't the Problem". I also covered this issue from the point of taxing businesses in a post titled "Tax or Not to Tax, That is the Question".

In "The Minimum Wage Isn't the Problem" I discussed the many issues that make up employment and setting the wage scale. Let me add to this by noting that artificial wage scales do more harm then good. If the cost to enter is prohibitive then few people will enter. Similarly if the cost to bring an employee up to a viable production level is too high then fewer employees will be hired. Automation and employment reduction becomes more important because the cost incentives for live bodies actually go down in comparison. A company may suddenly be willing to make that leap.
A further burden is also placed on those employees who have advanced in skill and deserve compensation for their work. I am now talking about the skilled workers who have struggled and climbed out of the lower wage scale and deserve an increase in pay. Where will a company find the money to reward these people when there purses are being robbed by an artificial wage for those of little to no value to the company?
In looking at our discussion in "Tax or Not to Tax" we noted that prices will increase when you and your competition have to deal with the same cost increases. You may remember that labor is usually the fall guy if price is not adjusted when new expenses are suddenly put on a company. So here we have a proposal that attacks labor in two ways and ultimately means an increase in the cost of the goods or services sold. It also means an increase in unemployment because fewer opportunities will be made available. Let's not forget the increased incentive for companies to automate and further increase the line at unemployment.
If all that destruction to the labor pool isn't enough let's also remember that the reason all this started in the first place was that the cost of living was too high for those who are at minimum wage. Since the result of this wonderful plan is increased cost of goods and services, no ground was gained and much was lost. Can anyone not see the doomed spiral? Will someone suggest raising the minimum wage again to fix this?

Let's start fixing how the minimum wage is used or applied as suggested in "The Minimum Wage Isn't the Problem", and quit creating more problems.

Originally posted 7/28/2006

Tax or Not to Tax, that is the Question

Seems every time we turn around someone is looking to tax someone or something. There is currently talk of increasing taxes on businesses and corporations. We are being told that the individual has had enough and businesses need to contribute their fair share to the tax roles. Personal taxes have overwhelmed the family. It’s time for big business to pay what they owe society.

Hold up there! Before you get your knickers in a twist, let’s give this thing a good going over.

Businesses serve two basic purposes; 1) offer a quality product desired by a group of consumers; 2) return of profit to the owners/shareholders.

1) Let’s be honest if you make or supply something nobody wants, you won’t be in business for long. The product has got to come with a quality standard that makes it desirable or competition will muscle in on your action.

2) Businesses need to turn a profit for many reasons but the key reason is a return on investment for the owners. They put a lot of hard work into the business through earned cash or sweat equity. They are looking to be rewarded for the effort and profit is the reward.

If you make a quality product, and offer it at a fair price, customers will buy it. The balance comes in keeping the costs of making this product down so that a profit will remain in the end.

So how does all that happen?

Competition in the market place usually controls the final price so the secret lies in getting the product marketable. There are three key variables, labor, raw materials and profit. Labor includes facilities and people. I am not aware of any company that is so completely automated that no people are involved. Raw materials go into everything even service related products. Finally, there are profits. Profits are the lure that bring in capital investments and allow for growth. No matter what part of your business needs improving, nothing will happen if you can’t show a way to return the investment. So profit ultimately means life for the business. If profit is reduced then investment capital is hard to come by. If profit goes up, investment capital finds you.

Given the fact that the final price is fixed by the competitive market, when a new expense is added into the business variables, how does it balance out? With what you know about profit as the life blood of the business, it’s going to have to come from one of the other two.
So do we cut facilities and labor? Most facilities are long term investments and generally won’t work to facilitate a sudden expense. Labor is a day to day expense and tightened controls and reduced costs in this area usually become a primary focus.
Raw materials are also chosen to deal with the new expense. We find lower quality or cheaper cost goods to make our product. This often hurts the final product and reduces customer appeal. Great care needs to be taken when changing raw materials.

If luck should come our way, all our competition will also face the same expense increase and we simply have a rise in the cost of product. This becomes a neutral occurrence on the balance ledger.

Get to the Point already.

Taxing a business is simply adding another expense. This new expense generally hurts the little guy by lost wages or unemployment. If the price is increased, then it hurts the customer. You and I are the customer; we are the “little guy”. One way or another, this tax becomes an increased personal expense for you the individual through higher cost of goods or increased social services. Let’s also notice that this indirect tax usually comes with a lot of handling fees along the way that further adds to the burden.

Taxing business is an indirect tax on you and me. I think I pay enough personal taxes, what about you?

Should business be taxed? I’ll let you ponder this question for a while.

Originally posted 6/05/2006

Problems with the Opposite Sex in the Workplace

The problems between the sexes are more psychological then real. If you tell someone enough times they have a problem, they will have a problem. The real problem comes when you start believing you have a problem and you take steps to counter it. The steps chosen usually create a problem.

Let me try an example. Let's say you regularly talk about your day with a co-worker. Then someone casually mentions to you with no real thought attached, "You two seem to hit it off real well." Since you have always been told that there is a problem when relating to the opposite sex, you assume that this person is subtly pointing out the fact that the two of you are getting pretty chummy and maybe there is more then meets the eye. Maybe you think the other person sees more into this relationship then you and you need to establish some distance to wart off this problem. Reality is the other person sees this as casual friendship, no relationship attached, just like you did before the word came down. You now over react and start dodging this person and making excuses not to have these conversations. The other person then gets upset by your behavior and reacts. Now we have a problem.

Simply establish personal rules and live by them. Be someone of your word and don't jump to conclusions. Test everything and dismiss most of what you hear. If you can't establish it as fact, it is hearsay and should be questioned or tossed.
I work closely with those of the opposite sex as their supervisor. I often have to work one on one. I have set rules in my life that are very apparent. People often kid me about my high moral standards. If you can stand up to the test, time and time again, there is no question. There is not a person in the company that does not recognize and respect how I conduct myself and treat others. With this high a standard, there is little to no chance of ever being put in the hot seat for any form of misconduct.
Anyone can lead this life. It does not take special equipment or training. It may require you too learn self-control and logical decision-making, but these are skills that should have been honed in your formative years. If they lack, it may be rough going until you deal with these issues. Make a list of what is and is not acceptable and abide by it. Consider issues of contact, location, leader-vs-subordinate rolls, topics and body language. If you can stick by your word and live by your standards you will gain respect and these issues will no longer be in question.

Originally posted 6/02/2006

Corporations-Do You Know What Your Investment is Doing?

Corporations are the back bone of American business. There are good and bad examples just as there are good and bad in every other category. The corporations as a whole are not bad; there are a few bad apples that ruin the batch. Most corps are under fifty employees and have simply incorporated to take advantage of the various personal protections under the provision.
A corporation much like a baby is its own entity and can be given various benefits just like you as an individual can acquire. These benefits can include a credit rating and various buying power leverage. This leverage is not necessarily reliant on the cash worthiness of the owners but on the same basic merits of any regular individual. One could argue their merit is better for the reason of eternal life. A corp does not die with the owners. It can be passed on or sold in various forms. This longevity does offer some additional benefits when being considered for long-term credit obligations such as buildings or equipment.
Under the corp provisions in the US many of us can partake in public corporations. We can buy and sell shares as participants in ownership. With every share also comes the right to vote or have say in a company and its actions. Many stock owners sign proxies that give their voting rights to others and some just don’t participate in the process. Just like our political system, the few who participate make all the rules and set the courses for company business. Our armchair politics and unwillingness to get off the sofa and make something of our vote is affecting our country in many ways. We are seeing the morality and direction of our country and business world eroding. As well as we are witnessing a complete disconnect from our political candidates. Some poles have placed only 40% of Americans at the voting booth. I would not be surprised if over half of those who show up are from special interest categories. How are we going to reclaim America if you are letting the minority special interest groups make all your decisions for you? We are doing it at the voting booth in both political and corporate arenas.
You the voter can make a lot of changes in many ways. The next time you get a proxy request send it back with “NO” checked as your option. Failure to respond to many of these automatically approves your proxy. Don’t be robbed of your vote. This is your investment and you should make sure you are satisfied with the direction it takes. Look over the options and investigate the candidates. Most Corporate sites do a fair job of mini bios. E-mail the company and ask questions. Try to achieve some satisfaction.We can change America Politically and Corporately. You have the power, now use it.

Originallyposted 4/29/2006

How Do I Understand Price Structure In Business?

Since I do not know the type of business or what is truly behind the question let me start by providing you with information regarding how payroll and equipment effect the pricing structure of goods.

Studies have shown that successful companies have a total payroll expense of 20%-30% of there gross sales. There are those more labor intense markets that occasionally show 35%. There are also those low labor companies that come in at 15%. For the sake of argument we will use 25%. This would mean a company must gross 4 times its total payroll cost in order to turn a profit and thereby be successful.

Payroll cost is made up of a number of factors.
Social Security
Employee portion
Employer portion
Medicare
Employee portion
Employer portion
Federal unemployment
State unemployment
Workers Compensation Insurance
Employees Portion (minimal)
Employers Portion (Substantial Averaging $5/$100 paid)
Local Taxes (Transit, City, County, etc..)

Not to mention Benefits and Insurance packages that may or may not be part of the companies total payroll expense.
These could include:
Health Insurance
Dental Insurance
Vision Insurance
Life Insurance
Supplemental Insurance
401k
and other fund function accounts.

On the average for every $.25 paid in straight payroll the company pays out of pocket $.31 (Plus Benefits and Insurances). For example: An employee earns $10/hr worked. The companies true out of pocket payroll for this employee is $12.40/hr (Plus Benefits). That is a 36% increase in cost per employee per man-hour.
As an employee that would mean that you would need to make 5.5 times your payroll every hour for the company to stay afloat. That same $10/hr employee must earn the company $50/hr so the out of pocket payroll percentage would be 24.8% and we still haven't accounted for the benefits.
So when you go down to the local garage and they tell you the rate is $55/hr to work on your car, you know that the average payroll is $11/hr. You can further bet that they don't have all the latest and greatest equipment at this rate or the best help and technicians. Since the average payroll for an auto mechanic in 1998 was $13.16/hr, you probably wont get the top techs unless the labor rate is closer to $66/hr.
As you can see by my example that you now are able to calculate anyone wage and cost to the company based on simple and easy to get data.

We can further extrapolate to equipment. Every piece of equipment in a company must earn the price of replacement in five years. If you pay $100,000 for a piece of equipment it will need to earn a minimum of $20,000 each year plus the operator cost. This falls into a similar category as payroll with 5 times being the minimum requirement for a company to stay in business. If the equipment lasts longer or can still offer comparable production after this point it would be profit. If your maintenance and operator keep this piece of equipment in top shape you do have some room to price adjust and give discounts to top customers and cash payers. Utilizing a second shift increases overall wear but the cost to operate factor is far less and profitability far higher.

Generally speaking a piece of equipment needs to earn its value each year. This would allow enough money to pay overhead, utilities, labor and such that would go into keeping it going. If a $100,000 piece of equipment earned you $100,000 in business each year you would be at break even. In order to turn a profit you would need to exceed its value. Also recognize that in addressing this pricing we may have equipment that can not achieve its value but necessary for your trade. Other more sell-able equipment will need to make up for this. It may be best to think of total value of your equipment and therefore total annual earnings necessary to break even.

I hope this helps you better deal with money management and employee cost considerations as you move into a management position. The bottom line is what makes business. Failure to understand and utilize this as a tool will greatly hamper your effectiveness. Now that you know you are well armed and have increased chances for promotion. You can have bottom line discussions with higher management and better understand your department budget and performance.

I think that this will give you the tools you need to make these types of decisions as well as get a better idea of how your money is working for you in other areas.I have consulted for businesses for a number of years and this is one area that lacks understanding. I would not be surprised if this is a major wedge that causes many businesses to fail. We want to be fair and competitive. These have costs and need to be recognized. If we as employers as well as our employees clearly understood these principals, the business world would be a far better place.

Originally Posted 3/17/06

The Minimum Wage Isn't The Problem.

How we use and apply the minimum wage is. The minimum wage was designed to be a starting place in the work force. It was designed to keep the cost of training and education of a new worker low while they are learning to be productive in a new field or career. The intent was that someone with no training or previous experience would be given an opportunity to enter a career field at a reduced rate to encourage new employment and training by a company. The employee once achieving a level of function profitable by the company, their wage would compensate to that level.
Where we went wrong. Automation has reduced many skilled jobs to simple daycare. In many factory line settings a person is simply there to hit a stop button if something should go wrong. These positions often require no real training and little physical energy. This person may simply sit on a stool all day next to a line and watch product go by. Companies fail to recognize profit for this activity so compensation is low. Instead, employers should see this as profit insurance because it keeps things going and minimizes down time when things go wrong.
Job loyalty by both the employee and the employer is part of the problem. Less then forty years ago company loyalty was a standard. People still dreamed of finding a good company with a future and working for them until they retired with a good pension and plenty of company loyalty on both sides. Those days are now far behind. The average employee will be at a company for 3-5years and move on. This short-term employment structure has greatly reduced loyalty and reward for such. Why invest heavily in a short-term situation. We can see in standard business how the length of the term of contract will predict the profitability of it. As the time increases the rewards to both sides increase and the contract become of benefit to both parties. We have a reduced time in the work force and hence a reduced reward.
Technology has reduced the knowledge base in the work force. Skill and knowledge in your career field was much higher thirty years ago. With the computer almost everywhere the need for knowledge has reduced to simply pushing a button and the answer is in front of you. The old know how is been replaced with a do what it says.
Education isn't what it used to be. Our youth used to come out of school and be able to do the basics; Read, Write, Math, and problem solve. A high school education meant you knew something. Most now a days scoff at a high school graduate. They can't do any of the basics. You have to go to college just to get a basic education. What we new in 8th grade 100 years ago a college student couldn't even pass the test with a "D" today.
Selfish ambition on both sides of the job market has also contributed to the problem. Everyone has become so ME centered that trust and encouragement has been tossed out the window. The employer is so worried about their bottom-line and themselves they fail to give a care for the employee. The employee is so wrapped up in themselves they no longer consider the employer. No mutual ground is established and each functions as if the other is out to get them. Paranoid, maybe, but the selfishness on both sides has cut into profitability for both. The failure to build a relationship of trust and mutual desire to succeed has pulled both down. The lack of encouragement in both directions has further soured the relationship. Then add in the above short stay syndrome and you have quite a problem.
The timetable has gotten out of hand. We no longer allow the time for quality and craftsmanship. We expect a certain percentage of failure. This expectation is the seed of ultimate failure and vast loss of profitability. We need to be able to take the time to make sure it is right, to allow the ink or paint to dry before we deliver. We say we want a quality product but NOW out goes quality hands down. Few things of any real value don't take significant time to get together.I have touched on a lot of issues here and believe me, I could go on. The key to solving the poverty issues is bigger then the minimum wage. Yet, I will make a suggestion that goes beyond the obvious above. We need to create a standard that re-establishes how the minimum wage is used. I would suggest that any employer who applies the minimum wage to an employee for more then six months should have a penalty. It generally takes three to six months to get someone skilled to a level of profitability in a given position. This person should either be rewarded for success or ousted for failure. That should be followed up with positions that show constant rotation of employment should be demonstrated as stepping stones in moving up in a company or penalties should be in place to keep employee rolling down to a minimum as a way to dodge wage increases. Many would argue that that level of government involvement is too hard on business. I instead would argue that the product waste and loss or profitable wages has reduced everyone’s profitability and the greater good to all needs to be considered.

Originally Posted Friday, March 17, 2006