Beyond the Books: Turning Your Accounting into a Competitive Advantage, Ep #20

Also looking at the black and white, it doesn't tell a story. But the people that are out on the floor that are doing the job have the story to tell you and share. You want to be able to know what they see, how they feel, but also set up a sort of relationship that when things go bad, they're going to come to you immediately. All right, shop owners, listen up here. I think all of us know we are in one of the most and capital intensive businesses there is. And margins are tight and we're always fighting issues. And then when we make money, what do we do with it? Start markets up and down all over the place. Well, I get asked a lot about where can I invest my money? I'm a firm believer as business owners, you've got to invest in yourself first. You need to reinvest capital into yourself. So the number one thing that I've done in this industry and investing was pro shop PRP. We've been using pro shop since 2018. And my payback literally was within weeks with their per user-based pricing. I knew when I made the decision, I only needed to save my workers roughly one hour per month. We saw within the first week we were saving multiple hours per day. That type of ROI just doesn't come along very often. Outside of that, the real value has been able to quickly implement best practices across my entire shop from the time we get in order to the time we ship it, scaling my business with confidence, being able to go out and know that I can deliver on my promise to deliver quality parts to my customer. And then gaining insights into every job, employee, machine, and every process in our business to really drive efficiency and look for opportunities for improvement. That's where the real value in your business drives. So visit pro shop ERP.com, book a demo and start realizing ROI today. That's pro shop ERP.com. Welcome to Buy the Numbers. Each week, we'll explore the numbers that drive your business, from accounting and finance to operations and the exciting realm of mergers and acquisitions. Whether you're a seasoned veteran or just starting out, our discussions will equip you with the insights and strategies you need to rein in the power of data to elevate your manufacturing company. Let's crunch some numbers. [Music] Team, welcome. I've got a full screen here. Three of you here. I'm going to let you guys introduce yourselves, but listeners, you're going to be familiar with where they all work. It's Clifton, Larson, Allen. We've had some other people on talking about taxes and tariffs and funding and all sorts of things. And CLAs so involved in the manufacturing industry. And, you know, without even asking them to tell you about it, you really should be following them on LinkedIn and stuff. They're putting out so much good content for manufacturers. Really daily. And they have so many webinars you can sign up for to talk about all sorts of operational issues. There's one out right now or getting ready to start, depending on when you're listening to this. But starting at the end of April, there's going to be a three-part series on tariffs that I'm looking forward to because I'm realizing how little I understand about tariffs. Yeah, so Phil, Mary, David, who wants to go start to introduce yourself here? Let's start with Phil. He's on the far left of my screen. Sure. No problem. Yeah, appreciate it. Thanks for having us, Mike. Phil Ankey, principal here with CLA. I'm a little background about myself. I spend time in the insurance world and then ended up in the manufacturing space with organizations similar to many of your listeners. Did that for about 10 years and then came back to CLA working in our Holtzorce accounting function? Okay. I'll just for a small business. Okay, so when you say that just to put that perspective for people, maybe if I don't have an accounting staff, you might be on my team with CLA that's maybe closing my monthly books, quarterly books, whatever, or something like that. It's a very good brief synopsis of what we can do. I mean, so there's a lot more accounting, but yes, well put. Perfect. And Mary? I'm Mary Strand. I've been with CLA now for four years. Prior to my journey here in the outsourced accounting world, I've worked for private businesses from the small startup all the way to the large train or amcourt of the world. Wow. Wanted to come back and share a lot of my experience and knowledge with other people and other businesses that, you know, I know are maybe struggling because they don't have that accounting person or they can't find, you know, the right fit for the people. So always been in manufacturing. It's kind of kept me here and kept drawing me in. So here we are. Yeah, that's cool. David. Thank you, Mike. Yeah, David Malk. I'm out of our Minneapolis, Minnesota office. Ben with CLA for about six years. I had always been on an industry prior to joining CLA. So I was out on the shop floor and I was a CFO. I was a controller. I was doing all the different roles, doing a lot of the items that we're going to be talking about today. Cool. You know, when you guys were talking, I mean, this is a, this is kind of a complete rabbit trail, but it's something I just kind of want to say because I've had this conversation a few times lately, like at some community events. And, you know, everybody is really familiar with the labor gap that manufacturing is faced with, right? And as we are trying to pull manufacturing back to the United States right now, you know, that's just going to get to be a bigger gap, right? Like there's all these hurdles we have. And one of the biggest ones is labor. And I've, you know, I've had a chance lately to talk to a couple audiences of, you know, maybe young professionals, students and talk a little bit about manufacturing as a career. And one of the things I think it's lost is, you know, your guys is career and manufacturing, right? It's like when we talk about this labor shortage, we think about it just purely on the shop floor. We don't have enough welders. We don't have enough machinists. We don't have enough all of those skilled labor positions. But, you know, there's tremendous opportunities in manufacturing in all those other roles too, right? Because as we scale all of our companies, you know, we need accounting, we need sales, we need purchasing, we need logistics, we need all these other roles that I think get skipped over a lot. And I think, you know, all three of you just point it out. Like, here I am, you know, maybe I'm a CPA and a CPA firm. One of the largest in the world, but I was, I'm in manufacturing, right? I'm supporting manufacturing. I think that's just something I hope we change that narrative and realize that there are more jobs than, yes, we've got to fill the welders and the, we've got to fill all those jobs too, but we need to fill all these jobs. And, you know, fill with like what you guys are doing, I think, you know, also fills a huge hole in the space. I was just talking with someone the day and I've seen this a hundred times. You know, for some reason this industry tends to, and this can sound bad, but I've been in so many, you know, small to medium-sized manufacturing facilities over the years. And the number of times that like a brother, sister, a mom, a daughter, whatever is the entire accounting staff, and they are not, and they don't have a background in the accounting, blows me away. I mean, I, it's, I would say it's really the majority. And I think, you know, people see the accounting is just like, oh, yeah, just send the invoices and, and collect payments. And that's all we really need to do in that function. And as you point it out, when I asked about, you know, what does outsourced accounting look like? There's a lot more to it than that. So I would just tell listeners like kind of as part of this conversation and you hear, you know, what, what these three have to say. You know, think about, there's a lot more to accounting than just shooting out invoices and writing checks once a week. You know, there's, there's all these things we're getting ready to talk about. And, you know, maybe consider, are you treating that function as just something to do? Or are you using it, you know, to the strategic advantage of your company? And I think a lot of what we're going to talk about today takes you down more of the road of, of accounting as a, an important function in your business that can bring value. And, and I think, you know, as we talk through this, I hope you'll see that. And if you don't have that function internally, of course, this is a group of people that can help you or, you know, talk with your current accountant and see if they can help you, whatever. But you need to be thinking about these things. So with that little diatribe out of my way, because I just wanted to make sure to get that message out there. Mary, let's start with you. Let's talk about kind of laying that groundwork for what is operational accounting when we talk about it in that context. And what are the types of things that you're doing when you go into, you know, these, these manufacturers that you're, are your clients? Yeah. So, you know, we look at the first kind of like stage is, is a planning stage. You always have to make a plan and then you had to use the plan and then when it doesn't work, you make another plan. But we look, we look through, you know, when we do this, we look at like historical data a lot. We do a lot of analysis. You know, I'm going to set up the, you talk, you know, briefly and then, you know, we'll move into fill that will go more in depth. But you're going to, we're going to look at all your reporting, right? And then make sure that we're doing some sort of forecasting or budgeting as well. Because we, although historical reports are great, you have to be looking at them timely to make sure that you're making good decisions for where you're going to move to. Yeah, sir. There's not a lot you can change about the past either, right? Right. So you can use those to plan for the future. Absolutely. And then you use those reports to find, you know, flags, right? And then we look at those flags and then take the deeper dive to fix for the future. Correct. I've seen some of the stuff you've said and done and you talk about going like I'm putting on those still toes. Right? I mean, so I mean, that's part of it, right? I mean, you got to get out there and you got to see what's going on. Yeah, my favorite part was always I used to have them in like the bottom drawer of my desk because you never knew what you're going to call them. out there, but it's also important, right? It's important operationally to know that the flow, to see, you know, when you're talking about like capital expenditures or buying new machines or making investments, like what do you have out there on the shop floor already that maybe you're not utilizing? Because underutilized machines doesn't give you a good reason to go pay for another, you know, machine that's going to be half a million to a million dollars easily. Sure. What? And you can say, why aren't we just, you know, increasing the use of this, of what we have. You need to look at inventory. How does everything flow together? If things are really choppy that can, you know, tell you that, you know, when you look at the black and white numbers, why things are very choppy there as well or missing or unknown. Right. I was still looking at the black and white. It doesn't tell a story. You want to be able to know what they see, how they feel, but also set up a hybrid relationship that when things go bad, they're going to come to you immediately and not try to push those 500 bad pieces to the side, right? And then they, right. Well, and I love that, you know, you talk about that being, you know, kind of that first step too, because I think like most things in our lives, I mean, none of these answers are right for everybody, right? So, and you wouldn't know that if you don't get out there and look at what's going on. Agreed. Yeah. What's the equipment look like? The inventory, the raw materials, all of that. So yeah, I mean, that's the critical. Right. My favorite, you know, thing to think about is I hasn't told you because he's also manufacturing came in one time and they were dropping, you know, the semi was dropping materials off on the left hand side. And then, you know, 10,000 square foot down on the right hand side is where production started. Does that, you know, that doesn't make sense, right? And anytime you're taking time or you're moving product again, time and labor, it's all a cost, right? That becomes associated with it in a loss of efficiency. Yeah. You know, we talk about, I know, I know I talk around my shop all the time, you know, roughly if you look at our cost structure, just if I mean, a minute is a dollar, right? So that'd be it. That's $60 an hour. Give or take, I just call that kind of our baseline cost structure. Yeah, next to five minutes, right, to move that material across to 10,000 square foot building is costing you $5 one way or another, right? Either in loss production or, you know, something that not doing something else, that, you know, and we talk about, you know, when you start scaling that, so like I have 39 machines on my floor, right? So if we do something that could save, you know, two minutes at every machine, we just saved an hour, right? And if you can do that every day, you're saving a person, we, I mean, you could quickly get to 40 hours, right? And that's a person. And again, when we talk about this labor gap and I'm six people short, well, one of them or two of them might just be waste, correct, that I currently have, right? And just wasted movement and wasted, like lots of inefficiencies. Yeah, I agree. I'd, you know, another one to think about is when they go to do a setup on a machine or tear a machine down, do they have everything they need sitting right there? The answer is no. Right. Typically, I can promise you the answer is no. Yeah, typically they forgot the screwdriver that's back in the maintenance shed, right? We get the back, you know? But always something. Right. There's an, you know, but anything you can do yet to make that efficiency, you know, even like looking back at the machines and capacity, you know, can you run a lights out? Are you automated enough? Which, you know, I mean, if you're looking at like seven access machines, typically you can load a lot of material before you leave. And then if somebody goes wrong, they'll just shut down. And it's like keep going and you're looking at a disaster. So do you have the ability to, to do a lights out production and get that much more out of your capacity without hindering like your labor? Right. We have another podcast in the making chip family called lights out. And it's all about automation. And there's so many subjects there, right? So the, when we started in the world of lights out ourselves here, you know, one of the, one of the things we didn't think of on the, one of the first nights, we're like, yep, leave it running. Let's go, you know, and somebody forgot to, we didn't think to empty the chip hopper before we left. I'd never had that problem before. Right? And we came in the morning to a chip hopper that was overflowing with chips. We had good parts, but we had a messed a clean up, right? So there's to your point. I mean, that's kind of a, that's, that's, that's, that's totally different example. But it, but there's more to running lights out than just hitting the switch and turn off lights. So a lot that needs to go into that. And without getting out there on the floor, you'll never see it. You brought up a little bit about budgeting. And, you know, that's something that as I talk to some of our listeners and, you know, I think it's a widely underutilized, you have recommendations for people there. Or do you see, you know, some mistakes, maybe you often see and like what's some low hanging fruit to be better of budgeting? The biggest thing you said is that I look for or to tell my clients is you do need a budget. It is very important. It's an integral part of how to forward forecast our look for make good decisions. And it can be just as simple as running your P&L for the prior year, and trying to be realistic so that you know you can attain that revenue that you want to go up that 10%. And then even start there, right? Start at the total of what you want the year to look like. But also then, you know, then work backwards. Think about it. Are you sick? Look cool or you're seasonal? If you're, if you're one of those, you're not going to be take that number and divide it by 12. Because that's going to be a little unrealistic as well. You're going to have months that you weigh over produce or you're going to be reporting to your employees that they're underperforming. And that's not the case at all. Right. I had John Hughes, one of your colleagues on, I guess it was this week. We, the episode came out. And we both kind of geeked out a little bit when we start talking about budgeting. We both, they matter fact, off air. I think we talked more about budgeting than we did on air. But, you know, it's a critical piece and that, you know, there's anybody can, like you said, just take that P and L, right? And start there. Take your previous European L start there. Some of the stuff is going to be the same every month. You know, whether it's your rent or maybe you're insurance, like there's obviously some stuff you can just nail down. You know, one of the things that I think where I end up geeking out lots of times when I get into ours and I end up spending way too long is, you know, when you start finding the triggers for things in your budget, you know, and maybe some of it that doesn't really matter that much, but I'll still end up spending too much time on it. But I have not seen a lot of budgeting in, you know, this kind of small, medium sized manufacturing space. I think people said an expectation maybe even in their head, but I don't see a lot of it translated to paper. Do you see a lot? Like when you're coming into a new client, do you see good budget? No. You know, and most of the time there's just no budget, to be honest. Right. Yeah, like you said, it's in somebody's mind, you know, the owner knows where they want to go or where they think they can't know. And they often know really well. Oh, absolutely. They know their business, especially in a smaller one where they're hands on and digging in. Right. But they're also then making typically decisions on the fly. Yeah. Instead of using the data that's available or that they could use to make maybe a better informed decision. So not that it, you know, a lot of times it's hiring labor, right? That that throwing bodies is good. You know, you know, just throw bodies at a project to me like, Oh, see, now we have enough people. If you're already, you know, your expense is high. And like we said, you walk on the shop floor and you have three guys standing around in your tool crib. Right. You could be maybe use the cross like cross training and using somewhere else. Yeah. For sure. But yeah, I think just starting somewhere, you know, but really to like, you don't have to geek out like you said and get really down and dirty. But there are certain things that I always do have in the past for myself, you know, and working for private businesses, but also top of my clients through it is like, take that wage part out and do go through each person, right? Because you can't also just go like, raises for everybody this year. And then you're struggling, right? Revenue starts to go down and oh, oh my goodness. I think another good part though to remember too is you don't have to live and die by your budget either. Sure. It can be a living, breathing report that you can change. And actually that is typically where people move to ones they get good at budgeting is they do, yeah, start to do like the rolling 12 months or the rolling 13 months. They'll make updates along the way, especially oh my gosh, we just want a brand new contract and it's going to impact us by bringing in a whole new revenue line. Right. You know, so they'll make adjustments and stuff along the way. I'm glad you brought that up because it really does need to be a living breathing document, right? It doesn't you don't need to set it on January 1st. And this is what we're doing, 20 now in December 31st, right? Like you can adjust. It's fine. It's just giving you that forecast and it'll help you make decisions about adjusting and hiring or not or letting go. It's kind of like those put it up the bumper rails, right? You just do you want to stand between them? But it's not a hard line that you can't jump over them and you know, make some changes. Yeah. The one thing I always tell a lot of people to start talking about budgeting is it's going to be wrong, right? I mean, because I've heard people like it. Yeah, but I can't nail my down. It's not gonna be right. It's gonna be way high or it's gonna be way low. The chances that you're gonna nail it on the number is zero. (laughs) The, I mean, you might get your rent figured out for the year. I mean, I'll give you that one. But everything else, you know, I mean, your electricity bill is gonna change. Your revenues, your, I mean, everything else is gonna adjust and that's okay. I mean, it should. I mean, cause you're a living, breathing organization. Correct. And you're gonna have pivots that happen too. Like, like, at what these tariffs, you're gonna drop tariffs earlier. What they're doing. Sure. If they're gonna send people into a tailspin because they didn't budget for it or didn't assume that that cost would be passed through. Phil, let's take what Mary's kind of set up for us as kind of this foundation of looking and feeling of what's going on in the business and on the floor and those types of things. And let's kind of take that to that next piece of, okay, what am I gonna do with all that now? Yeah, and I think the real good piece to kind of stick with and this kind of goes along lines of the budgeting, the forecasting, kind of giving yourself a roadmap. And as you're building that and as you're looking at your core business and the actual historical data and establishing critical metrics that you wanna monitor your business on or KPIs. Yeah. And there are some, each business is different, right? Even within the manufacturing space, you could have capacity limits that you wanna monitor against revenue growth. So there are all kinds of different types of metrics that really can help you hone the business and also right size. You know, as you look at, as we talk about business as changing is if you establish KPIs, you create a kind of sizing to some degree by creating essentially percentages. Yeah. A percentage is a lot easier to compare on a $10 million business versus $20 million business. At its core, many of those businesses are the same. So by establishing those KPIs, it really allows you to continue to the monitor the business and then also as you're budgeting, put a litmus test to it because you can apply that same type of logic to that budget to make sure that what you're projecting and expecting is in alignment with what your historical business is. And then as you establish those KPIs, it really also provides you an opportunity to say, "Okay, this is what I wanna focus on. "You know, I wanna move my growth margin "by a percentage point or two. "It really helps you to focus. "Okay, these are the pieces that make up that metric." And then you can really start to hone in on what do I wanna push on? Yeah. And that's such an excellent point. And we've talked a lot recently on some of the shows about aligning your KPIs with your business goals, right? So one of my big initiatives this year and my organization is, you know, we've had some KPIs we monitor and live and die by for a number of years. One thing I kind of figured out last year is a lot of those KPIs take me getting this information from here and this information from here and doing a calculation to get this KPI, right? So I and I know in my mind, I knew what that KPI was, I knew what drove that KPI. But what I kind of figured out is that like between my management team and certainly on my shop floor level, they didn't necessarily know the KPIs that they have access to that drive the number that I care about, right? So, you know, when I'm looking at shop efficiency, you know, and having to do some calculations to get to that, you know, that's gonna go back to work order performance, you know, or performance to target for a guy on the floor or something like that, right? So how those compare? So, you know, really in this realm of what we're talking about here, even like in budgeting, I mean, if I have a, if I have a, maybe a high level target of changing my margins by 2%, what all goes into that and then being able to feed that down to the people that have control of it is critically important there. So what are some of the KPIs and metrics that you see? I mean, I, again, you, and you said it perfectly right out of the gate is like everybody's different. But, you know, using the premise of the fact that, you know, business is business, right? And manufacturing is manufacturing, are there other one or three or whatever KPIs and metrics that you think everybody should be paying attention to that you think is just really indicative of performance in general? Yeah, I think at a real high level, a lot of, I'll call it, you know, owners that we come across as the focus on, you know, say revenue and it's, and it's individual state as to, I want to drive revenue by 10%. Right. Well, really, if you look at the financial statements, there's a lot of metrics you can build on each other. When you actually look at gross margin, you can then parse it down further if you have different product offerings. And you can really start to kind of expand your financial optics and lenses to say, okay, part B, I'm, you know, my target margin is 20%. And then you can look at your part B and that's being targeted at 15% and you can actually, if you start to align that metric, then as you try and kind of push on the business, it's okay, do I want to target a higher margin type business or a lower margin? And that also, yeah, as you look at, and you look at two, and Mike is, how do you, when you start to drive the business, is where is the state on capacity and things like that? And when you start to actually knelt it together, you really feel like you can have a financial control and impact over the business. Some other things that are, I'll call not say, per se, a income statement type of focus, but it's things like working capital. What I mean by working capital is going to be essentially, what are you using in your day to day operations? Cash-wise, and how are you positioned for when you do make decisions? - Sure. - If you're making decisions on whether or not you're gonna be investing in capital equipment or whether you're adding a new service line, things like that where you really look at the liquidity of the business in your working capital to make sure that the decision you're going to make, you're prepared for it. And then as you, real, a clear looking at the business and growing it, you can monitor that KPI like a working capital and say, okay, I know I need to add a service, a product line here in 12 months. Well, in order to get there, I need to be monitoring my working capital so that I can check my liquidity as I get closer. Obviously, what I mean by liquidity is your ability to pay off debt in a short term. - Sure. - And those are really critical things. And then as you to kind of expand on that working capital as a big component of it is your account receivable term. How quickly are you turning cash and bringing it in the door? And what I really like to do is try and when we talk to our business owners that we work with is if you bring it down to kind of a rudimentary level into, okay, how quickly is cash from the point in which you are spending it? Or when your shipping product out the door, how quickly is it turning around and actually coming in your doors to be reused? - Right, that's a whole subject that I want to record an episode on some time. I like a lot of listeners we have. I mean, my core customers are pretty large OEMs. I mean, they're all investment grade, style, customers, investment grade, meaning they're publicly traded. They're whatever the case might be, but they're very reliable, but they're paying me in 90. Maybe I've had some propose 150 days, right? There's some big stretches there. And if you look at probably one of the more severe examples I can give this happened last year, we had a large OEM investment grade for sure. Most people would know the name of them. We had a very large project for them all do in like a three week period. It was, I wanna say it was, you know, pushing $4,000 order, something like that. Probably took us eight to 10 weeks maybe from PO to delivery on that project, something like that. And it was a pretty good chunk of what we did, during that period of time, maybe a third of or what ran through that time period, something like that. And I remember this specifically, it was due like end of January. We ship all that. I got paid in September. And, or no, I'm sorry, it was late August. It was almost September. And now think about that, it was $400,000. I mean, my margins are like everybody else's. Right, so I was out of pocket labor and material on that for six, seven months. It's a lot of money. Right, so my point in that story is, I feel like a lot of us in this space, lots of times our biggest lack of access to capital is our own customers. Right, it's not that I can't get money from the bank. It's not that I can't cash flow my business. Otherwise, it's these payment terms that get pushed and pushed and pushed. And then, you know, they're perceived favor sometimes that they're doing me of, you know, like early payment terms that when you annualize the cost of that discount you're giving them. I mean, Golly, you could be giving up, you know, an annualized rate of 10%, 20%. I've seen it worse than that. You know, and so I think, you know, to your point of, you know, monitoring that, understanding the cost behind that will also then help you price your jobs better. So my customers that I know those terms, I need to know my cost to capital to perform that job so that if it's outside of my norm, which I base everything on, if you're going to pay me in net 30, we're even Stephen. I'm not necessarily incurring any extra costs. Everything's great. It's pushing me out 60, 90, 120 days or you're taking a discount to pay me in 30, something like that. Frankly, I'm building that into the cost of the job when I bid it so that it normalizes my margins. Otherwise, I'm losing all that cost to capital that maybe I had to pull down a line of credit to finance running that job, something like that. Mike, actually, there's a client that I worked with where we started to incorporate that logic and fact pattern of monitoring your AR days and then also your accounts payable days and look at what that cash cycle looked like. Yeah. Because he was consistently in his line of credit, which added obviously stress to the business owner, stress to the business. It had prohibited for him from expanding and by quite frankly, really honing in on that, we were able to flip his cash cycle to his benefit, which then allowed him to get out of his line of credit and then allowed him to really focus on his core business and then look at, "Okay, what can I do next? How can I expand and grow into making this an even more profitable business?" Yeah. It's an excellent strategy. Like I said, I want to do an episode on it because it does a couple things. If you line that out correctly, one, it allows you to perform better and not be so strapped for cash. It really lets you be a better vendor to your customer that you're not the one calling him every day and going, "Hey, are you guys going to pay this invoice when you're going to pay this invoice?" I really need you to pay this invoice, because you've budgeted for that. Yeah, honestly, the way I have it priced into my pricing strategy now with the customers that do extend those really long terms, frankly, I'm making money on the deal. I know my cost to capital. I know what I'm charging them for that period of time. It's okay. I'll borrow money to loan it to you for 90 days. That's fine. I'll make money on it. I think it's a strategy a lot of people in this business need to understand a little bit better because at the very least, they're giving up too much margin to their finance terms in my opinion, but they're definitely not using it to their advantage. Again, that could be a whole nother show and it should be a whole nother show, but I'm glad you touched on that. You might work with a company and you're going to develop all these KPIs, metrics, and so forth to monitor health, tied back to different goals and so forth. This is probably a terrible question because I bet the answer is it depends. Are we monitoring these things daily, weekly, monthly, quarterly? I mean, probably all of the above. Go figure it depends. Right. I am fired up for Topshop's 2025 and you should be too. It's happening November 11th and 12th in Charlotte, North Carolina and it's one of the most impactful events in manufacturing. Nick, Mike and I will all be there connecting with shop owners, sharing what's working and learning right alongside you. You can't register yet, but head over to Topshop's event.com and sign up for updates so you don't miss out. You can do things daily, but then from a financial figure, I'd say realistically at a minimum, a monthly is highly recommended. One, it gives you a short enough point in time where you're able to be nimble enough to adjust and make business decisions. If you're looking at it because you got to keep in mind that any of these metrics are a point in time every time. So it's the more data points that you can get, the more you can identify trends. And then obviously you identify those trends. If you wait till the end of the year, if the ship is sinking, it's already sinking. Or if you need to adjust on a product line, if you're getting constant clutch points, is you can identify midstream or midyear and then really start to essentially pivot, whether it's in your pricing or whether or not it's, hey, I got to be putting pressure on my vendors, if it's a product line that you're targeting. And then also in tandem with that, you can align it with the budgeting, like with what Merit was going down with full cast and things like that is. Yeah, sure. You can really start to align it and put those kind of stakes in the ground to make sure that you're keeping the ship on its rails for a float as you really try and drive the business and control it. You have an opinion on like kind of lagging indicator versus predictive indicators there. I mean, like to me, you should have a pretty good mix of both. I mean, obviously, last quarter sales is about as lagging indicators you can get, right? Like, there's nothing I can do about that at this point. It's kind of like if you're looking at HR or you're turnover rate last year, very lagging, right? It's not measuring today's job performance or job satisfaction going forward. What are a couple of those lagging versus like predictive metrics that you look for in most businesses? And I'd say from a lagging perspective is it's a good history is great. However, history is old news. You can't change it because you alluded to when we started today. But as you're looking forward, you know, a big one that I think is common that we, you know, see in ones that are doing forecasting is revenue. Sure. If you look at a backlog, right? If for them, it's a, it's something tangible. Many business owners can actually see that come on in. So as you start to layer over looking at, you know, your revenue trends and your backlog and you start to almost bucket it out by month and start using it as a forecasting tool. And then you can start to layer on KPIs as to, you know, financial performance execution because, you know, when you have a forward looking sale forecast, you're already considering purchasing today or potentially, you know, the previous 30 days, depending on what you need for stock in hand to execute on it. So you should already be having an ability to forecast out profitability, you know, going out called 13 weeks. You know, I think they get fuzzier as the further you go out into the crypto wall. You know, I like that you also talked about the trending, right? So I a couple of weeks ago, I had my good friend Matthew Knicks on the show and we were talking about, we were talking a lot about the metrics he uses to manage his operations. And one of the things I found very interesting is he talked about. So he's got several locations, several different, you know, floor leads and so forth. And he has a red yellow green indicate, you know, a question, you know, good, bad and different, whatever of just the short morale. Now, when he said that, I was like, man, how do you do that? I mean, what if what if I see thing like I see everything great and Phil sees everything negative and, you know, like how do you take my green and his red and reconcile that without any sort of tangible number, right? And and he, he had pointed out it's like, well, it's not so much about like, well, one, he didn't feel like he had a lot of variance in how people see things. Well, he's really looking for is the trend of morale, right? It's not, yeah, you can't measure morale to a 87.2 average, right? But people know how things feel, right? It doesn't matter if I see thing, if I always see things as bad or, you know, a yellow, right? If it goes green or red, then something's happened, right? Or if I always see things as green and it goes yellow, something has happened. So I like how you point it out, you know, a lot of these, you just, it's as much the trend, you know, do you see things changing even in the slightest, you know, in something you can calculate a 7.2 is at a 7.2 this week and 87.1 the following and 86.4. Well, now we're starting to see a trend, right? We got a downward trend on this number, give you a good or bad thing, but whatever it is, we're seeing a trend. I like that you pointed that out. Okay, so we've collected a bunch of data. We've started to put it into a form, David, how in the world do we put this to use? What do we do with it? I've got all this data and I'm pulling data from my ERP system and I'm pulling data from my floor, you know, I've got my QuickBooks data, I've got all this stuff, how in the world do I use it and put it to action? So I think the most important part that you mentioned there, Mike, is that you pull data from multiple sources. You can't rely on the balance sheet, the income statement, the cash flow statement. They give you an indicator of what is generating those numbers. That's where we, one of the first things that we talked about was Mary putting on her steel toe shoes and getting out onto the floor. And that's where the numbers are really generated from. And so you basically have three spots that we want to talk about when you're out on the floor. First is collecting the data. You have to make sure that you're collecting really good valid data. And so there's a lot of ways that you can do it. You don't have to be the most advanced company in the world to collect data. It can be done with a paper and pencil. And it's probably a great place to start. And the reason that I like that is that you are not asking the computer to do all the work for you. do all the calculations for you and ultimately you take action. What's really happening with a piece of paper and pencil, your team is now involved. And I love to have the operators out on the floor, your quality individuals, your tool crib individuals, all part of the process because most of the time the computer might not have the best answer for you. The answers might come from the most unlikely sources and that is the people that are currently out there. And then taking that data that you've collected and then analyzing it and using a collaborative approach for that as well. And the team members knowledge background experience that they've had of years helping you make the part being part of that manufacturing process and taking it to the next level. And then the wonderful part about that is you work collaboratively as a team as to how we arrived at those numbers and now work out a solution again collaboratively. And someone's part of the process, they're part of the solution as well. So you figure out solutions and then you be very visible with what you're doing. And so my number one way of doing that have a team approach and that comes from the front office to the back door. And if you have that, then you're on your first really successful step to success. Yeah. That's such a great insight into that. I like that you mentioned just, you know, grab some pencil and paper, right? So I'll give you a short example of kind of where I had to, I got a little bit of slap in the face myself, you know, whether it's collecting data or reporting data. So I'll sometimes get stuck in, I want it to be perfect, right? The way I'm either collecting that data or the way I'm presenting that data, either one. So my mind starts going to, you know, automated data collection into a dashboard that we're putting on a TV screen or anything like that, right? So I'll hit this wall because maybe I don't either don't have the time or the resources or the skills or, you know, whatever to do that to the degree that I, the vision in my head. So about six months ago, I was up visiting a client in Kansas and it's first time I'd been in their shop. It was a new client and hands down probably the one of the most advanced and sophisticated shops I've ever been in in my entire life. I mean, everything was perfect. I mean, you could eat off the floor, everything's in its play. I mean, like, it's just beautiful shop. And as we're walking through, there's, yes, there are TV monitors with data displayed and there's all this stuff. But there's also a roll away whiteboard, you know, over in a cell with some handwritten data on it, right? And it was a good, it was kind of a good wake up call for me is like, I mean, here's one of the most sophisticated shops I've ever been in. And I asked about this, like, you've got this TV screen here, what is this? Right? It's like, well, there's some new stuff we're tracking on here. There's some new, there's, there's new data we're collecting and there's new data we're sharing. And we don't, we haven't perfected that yet. Right? So for right now, it's just on this bulletin board and whiteboard combo roller thing, you know? And it was, it was kind of a slap in the face for me. It's like, you know, here's one of the most sophisticated places that have ever been, you know, they're able to break it down back to that simple of just grab a piece of paper and a pencil and collect the data, right? Like start there, you got to start somewhere. If you wait till it's perfect, you'll never, you may never get there, right? And that's, that's certainly something I know I struggle with because I, I have the vision of what I, I think I have the vision of what I want, but I don't necessarily have the resources to build it. I like that you started there, just like, go get it, you know, just do it. They'll let that stop you. So what are the types of things that you're looking for when you're in that situation with when you're clients, though, what is that data? How are you, how are you sharing that? What, you know, just break that down a little bit more for us. I think the number one thing that we always strive to is find efficiencies in what the client is doing and looking for, depending on what the circumstances are, it might be waste and how you might be able to eliminate waste. So if you see a rather large line on the, on the income statement and you see a large line of waste and you trickle that all the way back to where that number is being produced from and you try to find what's contributing to that and try to make it a better process. It might be that where you're creating your burden rates within the system and your burden rate is giving you a certain dollar amount based on your labor and then you go and you do your study and you compare that to what the burden rate is actually running and all of a sudden you're seeing that you're running at a 25% higher labor rate that should be actually contributed to burden or you need to make it way more efficient. But there's a gap there that you need to try to figure out what the difference is. So I think it's taking the true numbers that is an indicator or the driver of whether it be price, cost, efficiency, bottom line, margin, whatever it might be and finding out that you're really dealing with the best number that is available. Makes sense. So one of the things I know I've come across and I hear other people talk about when you go to the floor with some of this, maybe sometimes you fight some buy-in, right? From the people that need to do the, maybe collect the data or report the data or whatever. Do you have any good examples of where you've seen that as a hurdle and things maybe company did to overcome that? So I was dealing with a company a few years ago. They were on the very first steps of getting towards traction and on the traction path they decided they wanted to implement the 5S program. As part of the 5S program, getting everyone involved with the solutions was very important to them. And so they got to the point where they had shadowboards. They had markers on the ground from a safety standpoint from where the trash can is located at so that people weren't walking away from their pieces of equipment to throw away piece of trash. They never had a system where they had inline quality checks prior to this. And so they instituted an inline quality check. It's gone so far to this point with them where they went from the very infancy stages to three and a half or four years later right now where they have visual boards and they have implemented an ERP/MRP system that's in combination, that's pulling some of that data for them from the paper and pencil. Now they know what data they really need and the computer can do some of that work. You see people on breaks and at the beginning of each day checking their efficiencies, their realization, their utilization, all the key numbers. And it's almost turned into a competition that the lines can produce more efficiently than the people next to them and how they can utilize that equipment to its maximum potential. So it's really something that people just embrace and that's what you really want. You want the entire team embracing this improvement that's going to drive your margin and your bottom line. Yeah, I know. So I bought hill manufacturing seven and a half almost eight years ago. And we're completely, we're such a different company today than we were then. It was 41 years old when I bought it. We're coming up on 50 years. We were old, I would say we were old and tired when I bought it. And now we're always kind of pushing new technologies and a lot of things. So there's a lot of changes that happens from there. And we've definitely come up on a lot of brick walls of why are we changing this? We've never done it this way. We've always done it this other way. The way we've done it is fine. And in a lot of cases, those are true statements. I mean, it was fine. You don't survive 41 years not being at least fine. In the first couple of years, I really, I mean, lots of days I just felt like I was banging my head against the wall, you know, trying to implement change and collect data and report data and so all that. And, you know, for me, what it really came down to is just kind of what I referenced back earlier in the show is communicating to the person I'm asking to elect and or report this data. How it affects the overall goal, right? So really tying down like this overall strategy that we have buy in on, I mean, we talk about it all the time. And I mean, people know where we're trying to go. Why does where the trash can's marked on the floor matter to that goal, right? And just really breaking down that entire thing. And I mean, you know, where the trash can is on the floor is a pretty minor example, but it matters, right? I mean, if that's part of, I mean, you use this as an example and, you know, of a 5S project, I mean, why does it matter? Because to a lot of people, it may not matter, right? Like, what difference does it make if it's in that square that you marked off on the floor or if it's 10 feet over to the left? And to some degree, it probably doesn't matter, but it's still where it's supposed to be, right? And I think what it comes down to is it's almost a sign of the very smallest thing makes a difference. That just contributes to every other part of the process. And so you've got standard operating procedures and process and that trash can is always going to be in its spot. What's the next thing that's always going to be in its spot? We referenced earlier that we're going to do a PM on a piece of equipment and we take our working case over to there and we don't have all the tools. Now we do a shadowboard instead, right? And we make sure that every piece of equipment, and maybe it's a checklist before we walk out of that tool crib, and we know all the 15 pieces of the tools, the replacement materials, whatever is necessary is there at our fingertips. Down time, PM time. That's lost production time, which is lost dollars, which is lost income. So anything that you can do to increase that efficiency, you just try to build upon that and it's small incremental steps leading to big gains. - Yeah, it actually goes directly back to the example Mary gave at the beginning of this where, "Okay, here I'm here to do a setup. Do I have everything I need?" Well, typically no, right? I mean, there's always something. Why is there always something? 'Cause you didn't follow all the processes that David just mentioned, right? That you don't have that five S environment or you don't have all the things that roll into that. Why do you need all those things? So that when you're in setup, what you need is there when you need it. - An experience that I had that I could tell you about Mike in a very large aerospace manufacturer where I got to go to their assembly plant and I was expecting the most advanced technology in the world. And we were walking along the mezzanine because we weren't allowed on the floor. And we were watching in it. It's about a mile long assembly area for helicopters is what it was for. And we watched as during one of the locations they were working on the harnessing that went as part of the inside of the cab. And one of the workers put up a flag and the flag was a red flag. And above us in another mezzanine section were people that stood with basically Waki-Taki radios and they had binoculars. That red flag indicated something very specific. And the gentleman that was giving us the tour said the harness that he's talking about is the one that dictates or tells what the temperature is on the outside of the helicopter. So how they would adjust to the conditions. And there was obviously a fault there. Next thing we saw was a three wheel bike with it looked like from the Wizard of Oz. This three wheel bike with a basket on top of it with the supplies in there. And they only had, I think it was 22 minutes per station before it moved to the next station. They didn't have time to not have the right things at their fingertips. They had that new park to them within two and a half minutes. Wow. To make sure that they never lost sight of that production and efficiency. But going back to, they essentially said the kiss principle. They kept it very simple. Everything that they needed was right there at their fingertips by using a visual method, the flag, having the right people and having the right parts available to them at a very quick instance. Yeah, that's such a great example. You end kind of back to that. Every minute is a dollar scenario, right? I mean, think about if that two and a half minutes was 12 and a half minutes, right? And that happened six times a day. And in an operation the size you're talking about that dollar, that minute is worth more than a dollar, right? And exactly. The delay that that would cause and the money that that would lose. As we start to wrap up, I want to ask a question, maybe all three of you have just kind of a couple questions, maybe just a little round robin here. So if I'm a manufacturer listening to this and each of you could give in your experience kind of one, maybe two, low hanging fruit that you think applies to probably 80% of the audience of their operational accounting, if you will, of what they should focus on, what they should look at, what would each of you say to that? The biggest thing I think I typically ask questions about is how healthy the ERP system is or the QuickBooks or whatever they're using. Because again, you've talked about even just the communication from the floor, but if we're not putting good information in, we can do everything we just talked about. And it won't matter. It will not matter at the end of the day. So I mean, little things like, was the product received at the right time before the bill came in? And was the material checked out? What's your scrap rate? Did we record scrap? Right. Yeah, so the way I would phrase that, maybe in my experience of what I've seen is, let's use QuickBooks as an example. Are you using it as an accounting tool? Are you using it as a check with register? Or your ERP, are you just entering orders and creating packing slips? Or are you tracking your entire process? And like using it to be a better company and follow a process. And I've seen both sides of that a hundred times. And certainly the people that will use the systems and the tools that they have available to them. I would say universally are operating better than the ones that don't. On ERP systems are not cheap. There are a huge investment versus capital and time. So if you're going to do it, do it right. Yeah, just do it. Yeah, that's great. Phil, you got any input on that question? Honestly, probably builds on Mary, because I do aesthetically agree. And I think a lot of people deal with a QuickBooks as a check register. The data that goes in, it matters. Just like a many matters, and quite frankly, the data that when you put in, it should, when you look at everything we talked about today, is whether it's QuickBooks, whatever the accounting platform is, it should speak almost directly to what the operations are doing. They should say the same story. And if they're not in alignment, they're, it becomes very hard to drive a business. It's kind of like flying blind. You look out on the floor, it's like, oh yeah, everything's working great. And then you go look at your financial picture. And it's like, I have no idea what's happening here. Or vice versa, it's like, oh, I made a ton of money, but when I go look out on the floor, it's a complete train wreck. They should work together, and that just paints a clearer picture for you as an owner. My experience with a lot of businesses I've looked at in the manufacturing space. From a financial reporting standpoint, their income statements are generally pretty good. I have seen instances maybe where someone's taking their, they finance the piece of equipment, and they're really recording it more like a lease than something like that. But for the most part, I mean, even just using QuickBooks as a checkbook register only, you're gonna have a decent P&L, right? If you take the time to classify things, but I think balance sheets are usually, a lot of balance sheets I've seen or junk. The bank accounts fine, in luck cases, and maybe accounts receivable and payable. But outside of that, there's maybe not a lot of understanding of the accounting that goes behind your liabilities and certainly your equity section. Most people I know in this space, don't know, not even in this space, but across a lot of small and medium sized businesses, don't know what a cash flow statement is or certainly what to do with it. This will probably be the 10th time and by the numbers episode, I've encouraged people to really spend time to learn about those three financial statements and how to use them to manage your business. I mean, there's a reason they exist. They're incredibly valuable. The fourth one I would throw in the mix that I think is probably even more valuable than those to most small businesses, for sure, is like a 13 week cash flow. Cash flow is the heart and soul of your business, really. I mean, it's, back to the example we gave of the, you know, kind of that big job I had, right? I mean, I, that I didn't get paid on for six or seven months. If I wasn't managing cash flow, well, I'd have been out of business by the time they paid me, right? So, so really understanding how cash flows through your business, I think, is critical and I think, you know, right on point with what you're saying, like use the system. You have it, use it, learn how to use it. If you don't want to learn how to use it, call Phil, like he'll use it for you. (laughing) - I mean, not to put a shameless plug in for, you know, CLA, but there are professionals who can help on a financial level. - Right, and that's the point. Yeah, I mean, use the folks on this call to help you. I mean, it's, it's critically important. David, how about you? What's, what's that low hanging for you? You think people could nail down? - I think one of the really important things is to control the controllables. And one of the things that you mentioned was cash flow. That's one of the things that you do have control over. And don't just allow it to get away from you. Monitor it, use the statement of cash flows from a historical perspective to understand where the cash has gone previously and build that 13 week forecast. So you've got a quarter look ahead all the time. You know, other controllables that you're talking about, it might be your electric belt. Where is there any kind of waste that goes along with that? Is there any kind of refunds and kind of discounts that you can do different ways that you can be more efficient in your manufacturing process? And then things will kind of fall in line if you do the right things with the things that you can control. - That's probably a great summary of this whole thing. That's a great way to kind of build towards the end here. Guys, thank you so much. I think this is really valuable to kind of understand how all this kind of can work together and how to take your, your, your financials and build upon those to reach your goals. You know, whatever those goals might be. I mean, you could be trying to grow top line. You could be trying to grow bottom line. You know, all this stuff we've talked about will help you do those things. And you know, or maybe you're positioning, you know, to sell in the next three to five years, right? I mean, these same types of things. You want to drive EBITDA, so you want to drive down costs. And you know, whatever those goals are, I think a lot of the things you guys talked about can be pointed back to drive those goals and help you achieve that short term and long term target that you're shooting for. How do people get a hold of you? We just gave a shameless plug for you there Phil. Like, so if, if somebody wants to reach out to one of you guys and follow up, on some of this or maybe get your help with their businesses. What's the best way to reach you guys? Easiest way is LinkedIn. I mean, you can find any of us on LinkedIn. Also obviously, our website. You can find pretty much any of us on there. And then I'd say, you know, if you do follow us on LinkedIn, we're constantly active on it with webinars, things to help, you know, businesses. There's lots of good content that's honestly free. Yeah. And then also, you know, if you want to elevate your accounting and things like that, you can always reach out to us and whether be via LinkedIn or directly through the CLI website. Yeah. So listeners, I mean, you know, I said this at the beginning and Phil just mentioned it. I really would recommend to go follow CLI on LinkedIn, maybe other platforms too. I mostly follow on LinkedIn, but you guys do, I mean, weekly, you're putting out content that is relevant to manufacturing. On these types of topics and a lot of others, you're constantly holding webinars, you're constantly publishing articles, there's so much valuable content that can get little nuggets of action from and, you know, have a positive impact on your business. Guys, thank you very, very much for being here. I think this is, I think this was really good. I hope, you know, you had fun doing it. listeners, thanks for listening. And, you know, if you can't find them on LinkedIn, you can't find them on their website, reach out to me. I will certainly connect you. I've got emails and phone numbers for them as well. Yeah, I always happy to connect you with our awesome guests and guys, thanks again. listeners, you know, maybe share this with your accountants too and make sure they hear some of these things and they can start thinking about how you guys can integrate some of the things that this group talked about today into to what you're doing. So with that, we will talk to you next time. Hey guys, it's Nick and I'm so excited about Machineshop Mastery being part of Making Chips. So my good friend Paul van Maider, he's been a partner, he's been a sponsor, he's been a friend, and he's been involved with Making Chips for a long time. And now his podcast that I love is part of our group. Here's why you should listen to it. Paul doesn't just run a software ERP company for machine shop leaders. Paul was a machine shop leader. He loves machine shop leaders. He's the one leading the charge to thank all the machinists out there for all the incredible work they do. And the best thing about him is he actually knows how to make their incredible work turn into an incredible business. So when you listen to machine shop mastery, you're going to hear Paul and his guests talk about exactly what they've done to overcome their challenges and make their business successful. You're going to get those kind of like heart wrenching stories that tell you what people have been through, things that you can empathize with because you're a manufacturing leader too. So check out machine shop mastery and learn how to master your machine shop hosted by my good friend Paul Van Maider under the Making Chips Network. Thanks.