Highfill Consulting

Highfill Consulting is a decades-old (1976) financial services firm dedicated to helping small business owners and managers improve their bottom line.

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Small Business Owners Should Listen Up

You are a small business owner.  To the federal government, you can have as many as 500 employees and still be classified as a  small business. There are nearly 30 million small businesses in the United States according to the government's criteria.  However, I have made a career consulting with small businesses in the range of 1 to 40 or 50 employees, and sales from start-ups to around $5 million. Even within these ranges, there are probably more than 20 million businesses in the U.S.

Most small businessess do not have well-developed accounting and financial departments, and they don't need to.  In my experience, it seems that businesses in the range of $5-10 million in revenue begin to beef up their accounting departments so that they can have access internally to the same kind of analyses that I do for smaller businesses.  Whether it is a good use of resources to go out and hire a couple of CPAs or MBAs when you can get the same level of service outside the company is a question worthy of discussion.  In my personal opinion, there are many resources available to you in the marketplace at a substantial savings compared to hiring full-time people. However, in the small business market I work with, most owners don't do either.  

They don't pay out big bucks for internal staffs, and they don't avail themselves of the experience in the market place either.  That is sad, because I can help your company become more efficient, more effective, improve cash flow, relieve some of the pressures you feel, and improve your bottom line.  I can do this because I have been doing it for more than 30 years, and because I have an absolutely proven model used with thousands of small businesses over the years.  To use a baseball analogy, I would say my batting average in improving small businesses is probaly .950.

And the cost of improving your business is so small that it is not worthy of discussion.  But if you already think you know everything you need to know, or if you think I would not understand enough about your business to tell you anything, you are right.  I probably would  not be able to help you. Over the years, I have had several restaurant clients, for example.  I will compare two of them.  One was a diner who did maybe $200,000 in a good year, and took home maybe $30-40,000.   His attitude was that if I didn't know how to fry an egg, I could not help him very much. I did his work, but he was not a good listener.  In the meantime, across town, another client did about $1,000,000 in sales, and took home a little less than $200,000.   I did his work too, met wtih him every month, discussed many strategies for improving his business, and he implemented much of what I could bring to the table.  The contrast between these two owners was stark.

But lest you think I focused on restaurants, be advised that I have worked with all kinds of businesses, in many industries, from attorneys, to retailers, distributors, manufacturers, and many more, including one management consultant.  He was a great consultant, but his area of expertise was not my area of expertise.

My data base has tens of thousands of financial statements, in 1,400 industries, and includes 60 metrics. There is a good chance that whatever industry you operate in, I can help you improve your bottom line.  If you read this, and you are a small business owner, give me a call.  We'll talk about it. That won't cost you anything.  Call 336-612-1348, or email me at [email protected].

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Missing

My wife is out of town for five days, the second such absence in the past month.  My loneliness is approaching 7.9 on the Richter scale, and days and nights are no longer defined by light and dark as a twenty-four hour period is one long blur.  Although she touches base with me twice each day, mostly to see if I am okay, Alexander Graham Bell never could have anticipated the inadequacy of his communication invention.

No machine can replace the feeling of warmth her body provides me in the cool, wee hours before daybreak.  While sound asleep, somehow she hears, even as I whisper, that my back is cold, and she turns to the spoon position to make me warm again.  I wonder if she knows that I deliberately turn the thermostat lower before I go to bed each night? And I, in turn, warm her back, as we alternate throughout the night.  There is nothing sexual about our experience, for those who can only think one way that may read this.  Ours is the merging of two existences into one.

I miss also, the inability to speak a complete sentence before it is truncated and finished for me.  Who needs to express a complete thought anyway—life is full of “fill in the blanks,” and it seems that I have more blanks than most.   But what about how busy she is the day before she leaves, shopping for groceries and preparing food for me, left in the refrigerator, to last me while she is gone?  All of my pleas that I can take care of myself simply fall on deaf ears:  Three packages of cookies, left on the counter, to satisfy my sweet tooth; a meat loaf, ready to bake, with a post-it note on top to pre-heat the oven to 325 and cook for one hour, or until brown around the edges—whatever that means.  Juice, bread, it’s all there.  How could I live so long, and be so ignorant?

Now I have to water the flowers and pick vegetables from the garden.  I suppose I will put the zucchini and other squash in the refrigerator since I don’t know how to cook it.  I think I can eat the tomatoes I pick, if I don’t cut myself slicing them.  They don’t have to be cooked, do they?  I washed and folded towels during her first trip this month.  That was quite a chore, although I will admit that I’m not quite sure what that stuff was that I poured into the washing machine.   My wife has a special way of doing everything; NASA has nothing on her.

I probably will not get around to dusting, and the spiders really need those cobwebs since that’s where they live, I think.  How do you get those things down anyway?  Is there some kind of long pole for that? I wonder if spiders spoon.  I am looking for the paper plates, so that I won’t have to make dirty dishes and start the dishwasher.  Men are really ingenious when we set our minds to it.

I don’t understand why I should make the bed, as my wife does every day.  I am just going to use it again tonight.  Make it and unmake it, make it and unmake it, every day.  That seems like a lot of wasted motion, but I suppose there is some reason for it.  NASA has nothing on her.  Showers are another issue—I don’t like to shower when she is not here.  Suppose I slip and fall.  Who will call 911?  Do cell phones work in the shower?  Well, it’s only five days, and I have already made it to the end of day one.

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Governments and Their Duties

I have been thinking again, and that could mean some off-the-wall stuff. Now, I am about as far from an anarchist as you can get; no society, civilized or uncivilized (whatever those terms mean), can exist without some form of government. I get that. However, the proper role of government in a society has been debated for millenia. That debate will not be settled here. Nevertheless, I offer the following postulates: If you think about it, most of the very serious issues facing the US society today seem to have had their origins in government policies. I will not enumerate them, but check those issues off in your mind, and post the exceptions you can think of on this blog.

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Accrual Basis Vs. Cash Basis Accounting

I am often asked to explain the difference between accrual basis accounting and cash basis accounting, and this question came up again yesterday.  The difference is:  You stay in business or you don't stay in business. Accrual Basis Accounting: There are no short-term decisions; all decisions have consequences in the long term. A lot of CEOs, managers and business owners get hung up on this, but it is not that difficult. Remember, you have a “new normal” way of thinking about your company and business in general—think conceptually. Accrued income is income earned but not yet received.  Accrued income generally means you record accounts receivable on your balance sheet, and income or sales on your profit and loss statement when those events take place.. Accrued expenses are expenses incurred but not yet paid.  Generally, you record expenses on your profit and loss statement and accounts payable on your balance sheet when those events take place. Remember the five-account concept?  Four of them are here:  Accounts receivable are assets, income is income; accounts payable are liabilities, expenses are expenses. Obviously, if you have done some work or sold something, and you have not been paid, you can record the income you have earned, as well as the fact that you own an account that will be paid to you sometime in the future. Accounting is basically the process of measuring earnings.  Accrual basis accounting measures earnings in a more meaningful way than cash.  Earnings can only be measured properly if two things happen: 1) Earnings are recorded when the event happens that gives rise to the earnings, that is, you provided a product or service, and 2) the expenses necessary to provide the product or service are recorded in the same accounting period.  The process of recording both the earnings (income) and expense in the same period is called the matching concept. It’s simple.  If I am going to record the income in June, or September, or whatever, I want to record all related costs in June, or September, or whatever.  Suppose you operate on a calendar year and in December you sell a significant amount of product and record the income.  But you don’t record the cost associated with that product until January.  This year looks great, but next year will start out with a loss.  Both years are screwed up and you cannot tell what is going on. It is difficult to make good decisions under those circumstances.  Accrual basis accounting avoids the problem by matching income and expenses in the same period so that you can see if you are making a profit.  Getting the cash in is another issue--right now, we just want to see if we have generated more income than expenses.

Cash Basis Accounting: You may think your dog loves you, but he is at your feet only because you feed him.  As its name implies, cash basis accounting means you record income or sales when you get the money and record expenses when you pay your bills.  There is no effort to match income and expense in the same period.  While there are some businesses which may be able to use the cash basis successfully, most businesses benefit more from the accrual basis. A few years back, I was talking to a potential client who was using the cash basis of accounting. His outside accountant was a franchisee of a national company offering monthly accounting services.  The potential client asked me, in a somewhat desperate voice, why he was behind on his bills when his financial statements showed a profit.  He was on the cash basis, and literally had a desk drawer full of unpaid bills. The potential client recorded all of the income when collected, which was mostly cash sales, and recorded the bills when paid, although the latter didn’t happen very often.   It’s a perfect world.  Receive income on one hand, but don’t pay out anything on the other.  I can assure you that your company will show a profit—for a while. The client hired me to look into the matter, which meant I had to record all of the expenses he had incurred but not paid.  He was broke.  Fortunately, he was able to sell the business and get a job somewhere else.  His wife also went to work for another company. In my opinion, the fault lies squarely on the outside accountant and the national franchisor, but they both took their money and ran.  But the accountant did the cash basis accounting as long as he got fed. Any questions? Call me at 336-612-1348.  I will answer your question more fully, if you wish. 

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You Can’t Run a Business by Trial and Error

We are all guilty of getting up on any given day and taking our stupid pills.  I am talking with some business owner, at least once or twice each week.  A few days ago I was speaking with someone about filling a position as director of sales.  This particular business owner had recently hired someone to take the position.  The person they hired was on the rebound, having recently been terminated from a previous employment.  The owner that I was speaking with had met, and had known, the new director of sales as an acquaintance from various trade organizations.  Now, 60 days later, we were having a discussion about how the director of sales was working out.  The company had wanted a short-sleeve type director, someone who would roll up their sleeves, get out in the marketplace, and make sales as well as giving direction to other sales people in the organization.  That was not happening.

The owner just whined about the fact that the backlog was not increasing, and the cash flow was destined to decline in a few months.  The owner basically said that they had tried this, and they had tried that, and maybe the sales director would fit into some other company function more appropriately.  Several things came to mind at that point.

The first issue is about something I call, “organization by personality.”  What this means is that sometimes we find ourselves trying to fit the individual, that is, the personality, into a position that works for them.  However, good management principles dictate that we identify the functions we need performed first, and then go about finding someone best qualified to fit the position.  It’s almost always wrong to make positions for people when what we really need is to get people for positions.

The second issue that I dealt with in this conversation is management by trial and error.  Just can’t run a business that way.  As much as I favor giving individuals time and room to rise to the level of responsibility placed upon them, decisions must be made when it is time to make those decisions.  Do not pussyfoot around.  Just do what you have to do.  Companies do not exist for the purpose of making sure this individual, or that individual, is comfortable with the job they have, and whatever they want to bring to it.  There are others involved.

In addition, there is a real cost in making the wrong decision or making no decision at all.  The cost that I’m speaking of here is called opportunity cost, and sometimes can be substantial.  Opportunity cost, as well as, decision-making are topics other blogs.

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Flashing May Be Healthy For You

I don’t mean the kind of flashing you sometimes see on television when someone runs across a baseball field in his birthday suit, although that kind of flashing may also be good for you. I haven’t tried that lately and I don’t have any immediate plans.  In this post I’m writing about the kind of flashing that should go between the deck that’s attached to your house and the house itself. Recently, I had to replace the deck on the back of my house.

Recently means I have been working on it for several months. At least I have a deck now, but the handrails are not complete. Nevertheless, my wife and I can sit on the deck and watch the wild life, hummingbirds and ducks on the lake. Hummingbirds are incredibly fascinating, but that’s a story for another day. Back to the deck. Last Fall I began to make some repairs on our deck. There were a few deck boards that were rotted on the end next to the house in two places. To get the deck boards up, and because some pieces of siding also showed some rot, I had to take some of the siding off the house. The deeper into the problem I got, the worse it got. Under the siding, the sill plate was rotted, and so was the rim joist. For those who may not know, the sill plate is a piece of lumber, usually a 2×8 which lies flat on the concrete or block foundation wall. This plate attaches the house to the foundation. On top of the sill plate sits another 2×8 or 2×10 in a vertical position, and this is what the floor structure, or floor joists, are attached to. The sill plate and the vertical rim joist (sometimes referred to as the band) runs around the perimeter of the house. The entire weight of the house rests upon these two pieces of lumber.

As mentioned, I noticed rotting in two different places. One area of sill/rim about six feet long and another approximately four feet long had to be cut out and replaced. Unfortunately, the house had to be jacked up, one area at a time, to relieve enough pressure to get the rotted lumber out. By this time, the entire old deck had been completely torn down, along with about 30 linear feet of siding. Thousands of dollars later, I’m almost finished. My son-in-law and grandson helped me, so I didn’t have to pay for labor, but all of the materials to completely rebuild the deck were expensive. If I had hired a contractor, a rough estimate of this job would have been around $25,000. I just needed to replace a few deck boards, or so I thought. This simple problem became a serious problem because of flashing. There was none. Whoever built this deck on the house attached it without any flashing (a thin sheet of vinyl or aluminum inserted between the ledger boards and the house to protect from rot).

In addition, there were only four lag screws holding the ledger board to the house. The deck is about eight feet off the ground, and was in danger of falling. Hundreds of people are killed and injured each year from falling decks. This was a disaster waiting to happen.  Our new deck ledger boards have many more bolts attaching them to the house and they are flashed and back-flashed.

There, I admit it. I have flashed and double-flashed in my back yard. Don’t make the mistake that the builder of my original deck made. Do your research; find out how to do things around the house the right way, for safety’s sake.

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How to Make $1 Equal $10

One of the most precarious traps for the small business is chasing the revenue curve. This phenomenon is especially noticeable in the current recession, or any downturn. Chasing the revenue curve simply means that your expenses, and the way you have your expenses structured, are at such a level that you are constantly trying to get more sales to stay above the breakeven point.

Here’s how it happens. Expenses are broken down into two categories: fixed and variable. There is also a category called semi-variable, but let’s just deal with the two. Although these categories warrant a detailed discussion, the following definitions will serve our purposes now. Fixed expenses are those that do not change over the short term, or stated in another way, expenses that do not change over a given range of production. Examples of fixed expenses include leases, fixed payments on capital equipment such as vehicles, mortgages, and so on. Whether your sales are up or down, these fixed payments must be made.  Variable expenses, on the other hand, are those which change with the level of production. Examples include labor (with limitations), rental of equipment, materials and other direct items used in production, and so forth.

As a business is growing, and is fat and happy, it tends to add capital equipment (fixed expense) since more units can be produced with a given amount of labor (variable expense). The up side to this strategy is that unit costs come down over a larger range of production and profits are greater. The down side, of course, is that when the revenue curve falls, as in a recession, the business bumps into the breakeven point more quickly and may even lose money. Invariably, the business cannot pull the cost curve down as fast as the revenue curve falls, so the chase is on.

A business that tends to keep more of its expense variable rather than fixed has an upside and a down side as well. The up side is that as the revenue curve falls in a downturn, variable expenses are easier to cut, and therefore, it may be possible to pull the cost curve down fast enough to avoid losses. The downside is that this business will not able to make the same level of profits as the business with more capital equipment. There is, of course, a balance which depends on the type of business. All other things equal, more variable is safer, more fixed is more profitable.

Recession prone businesses should err on the safe side, recession-proof businesses can be more aggressive. In any case, cost cutting measures should always be a priority. Take this example: if a business has a 10 percent net profit, for each $10 in sales, $1 in profit is made. To make $1 then, you have to sell $10. However, if you save $1 in expense, that’s $10 in sales you don’t have to make, and that may be $10 in sales hard to come by in a downturn. In this case, $1 is worth $10.