Garage door industry magazine for garage door dealers, garage door manufacturers, garage door distributors, garage door installers, loading docks, garage door operators and openers, gates, and tools for the door industry.
Issue link: https://idoi.epubxp.com/i/216705
MANAGEMENT (continued from page 48) disciplined addition and relief of all inputs and uses. If not, gross margins will be misstated, which inevitably weakens managerial decision-making. In the Up&Down; statement displayed in Exhibit 3, material-use was listed as $1.639 million based on the frm's "book" costs, and including freight. Had the preceding COMU formula been correctly applied, the number would have been $1.652 million, less than a 1.0% variance. In short, Up&Down; did a pretty good job of tracking its book materials costs. Direct Labor Must be Fully "Burdened" Direct labor costs, usually incurred for installation and service activities, must refect wages, plus incentive compensation, plus all employee benefts. Typically, the beneft package (probably unfairly called "burden") consists of the employers share of the Federal Insurance Contributions Act (FICA), federal and state unemployment taxes (FUTA and SUTA), healthcare benefts, workman's' compensation and employer retirement contributions. The package usually amounts to 20.0% to 25.0% of wages (i.e., total labor cost amounts to 120.0% to 125.0% of wages alone). Items such as union dues, special retirement plans and other benefts can push the total toward 150.0% of wages alone. The simple fact is that you cannot hire people for wages alone – at least not trained, committed people for the longrun. Labor costs must refect burden items, which may be itemized or simply added as a multiplier. The labor cost lines in the "Incorrect" column of the Up&Down; statement displayed in Exhibit 3 amount to $467,000, plus subcontract labor of $10,000 noted separately because it is not subject to payroll burden costs. However, $11,000 of installer incentive pay (which is subject to payroll burden) was excluded and treated incorrectly as a "below the line" bonus. In the "Correct" column of Exhibit 3, the sum of applicable employee benefts for Up&Down; direct labor can be observed as just over 23.0% of wages plus incentives, which brings the total to $588,000. The Consequences of Incorrectly Calculated GM A single margin miscalculation will not create a crisis. However, continuous miscalculation over many months and years will distort managerial understanding of the frm's performance and lead inevitably to strategic mistakes. Incorrectly stated gross margins will infuence pricing, product line, marketing and even wage and salary decisions. 50 International Door & Operator Industry™ The door dealership delineated in Exhibit 3 made an expansion decision based on its belief that it was generating margins in excess of forty percent. Had management had continuous access to the correct number, a more cautious approach might have been taken, and the frm would be fnancially stronger as a result. Other pieces of misinformation can also produce poor decisions. Misunderstanding working capital, not recognizing the difference between "proft" and net cash fow and a failure to reconcile business positioning to market opportunities are all consequential information mistakes. However, a correct understanding of margin is really a matter of accounting mechanics, and as noted earlier, correctly stated margins are necessary if management is to translate operating activities into a successful strategic business model. The Next Installment In the next issue we will examine how the negative impact of bad margin information is compounded by incorrect markup calculations. Additionally, we will examine the revealing concept of breakeven analysis and its dependence on correctly calculated margins. Perhaps most importantly, we will take an extensive look at product mix and examine how margin variation (or the "margin mix") infuences business strategy. John E. Zoller and David H. Bowen comprise Zoller Consulting, Inc. of Wooster, Ohio. Zoller Consulting provides consultation of managerial effectiveness and fnancial performance of construction related businesses. They also offer customized seminars and training sessions. In addition, Zoller Consulting provides acquisition management, including fnding buyers or sellers, locating funding sources, transaction structuring, and negotiating and organizing the transition to new ownership. Contact Zoller Consulting, Inc. at 330.262.8500 or John@zollerconsultinginc.com.