I Track Everything You Could Possibly Measure

Introduction:

Several weeks ago, we had a great conversation about how Jay Goltz, Diana Lee, and Dana White track their financials. It was so good that, this week, in episode 82, I decided to put similar questions to Paul Downs and Laura Zander. “It’s funny, I was listening to that episode,” Laura says, “and Diana said she’s a freak about the numbers. I’m like, ‘God, does that make me a superfreak?’” Laura walks us through why her labor costs can affect what types of yarn she carries, Paul suggests a quick-and-easy ratio that can signal when a business is in trouble, and Jay explains how an hourly performance indicator that he began tracking 30 years ago transformed his business. Plus: Laura tells us how she got a bank loan that’s almost three times the size of the one she couldn’t get last year.

— Loren Feldman

Guests:

Paul Downs is founder of Paul Downs Cabinetmakers.

Laura Zander is co-founder and CEO of Jimmy Beans Wool.

Jay Goltz is founder and CEO of Artists Frame Service and Jayson Home.

Producer:

Jess Thoubboron is founder of Blank Word Productions.

Full Episode Transcript:

Loren Feldman:
Welcome Paul, Jay, and Laura. It’s great to have you here. Laura, let me start with you. Anything new? Anything going on?

Laura Zander:
Oh, yeah. Actually, two or three days ago, earlier this week, we got formal confirmation that the SBA has approved our loan to buy a building in Reno.

Loren Feldman:
Congratulations.

Laura Zander:
That’s like saying congratulations when somebody says they’re pregnant. You’re like, “Really?” Or, getting married. Like, is it really a congratulations?

Loren Feldman:
I think it really is, isn’t it? You were very worried that this wasn’t going to go through. You were convinced that no bank would ever lend you money.

Laura Zander:
Well because this loan is like two to three times more than the loan we tried to get last year at this time. Same bank, same everything, and we got denied last year.

Jay Goltz:
It’s all relative to the cost of the building and the cash flow from it.

Laura Zander:
So last year, they put in some different measures. We tried to get the loan four months after everything got shut down, and I think the banks were just really scared. And in the last 12 months, I mean… The financials were in a good spot last year, and the year before, but the couple of years before that—which were still on their radar—weren’t great. We had lost money. So now those have kind of shed off, and this last 12 months, we did a great job. We did a really, really good job.

So the nice part is, because we’ve worked with the same banker—and I know, Jay, you always say, “Don’t work with the big banks,”—but it’s US Bank, and it’s the same dude who we’ve been working with. This is the third time we’ve tried. It was so easy. Like really, oddly. Because he’s had all of our financials. He knows our story. We’ve been working together for two years. Originally, we were going to try to finance the purchase of the business down in Texas through US Bank. So I mean, it was so easy that it’s just unsettling.

But I took Huck out of school yesterday, and Huck and Doug and I went by ourselves to the new building and measured everything and looked around. It’s a really wacky building, and the people who bought the building—or bought the land and then built the building and then lived in it or had their business in it for 15 years—they manufacture displays for trade shows. So all the fixtures are really cool. They’re all custom. Tons of acrylic signs all over the place. It’s a one-story building. It’s like a 16,000-, 17,000-square-feet footprint. And then they built a mezzanine. And over the 10 or 15 years, they’ve added on like all these little rooms, and they did a nice job of adding them on.

We call it kind of like the Willy Wonka Chocolate Factory. I mean, you get lost. You can’t really find your way around, because there are just tons and tons of little rooms, and there’s a little Harry Potter room that Huck is gonna use that’s under the stairs. It’s like this kind of cool, crazy house, which is actually perfect for us, because that’s very on-brand for us at Jimmy Beans. And like I said, they did a really great job. It’s beautiful. The colors that they used are really cool. They have really cool fixtures all over the place. So it’s just wacky. It’s just a little funky.

Loren Feldman:
And how are you going to use the building? Is there gonna be a retail aspect to it?

Laura Zander:
Yes, yeah, so you’ll walk in, and it’s a retail space. And then they have a customer service bay, three or four desks—four or five, actually, or six or seven desks in one area. And then you walk up the stairs, and we’ll have marketing and everybody else up there. And then in the back is a big warehouse space. So we’ll put all our racking back there.

And it’s exciting. I was talking to this really smart guy I know, my main mentor, and he runs a business in Chicago that is all about aesthetics. And he was saying, “You know, owning your own buildings should be able to increase your retail sales because now you have control of even what the building looks like.” Maybe we’ll paint a knitting mural on the outside of the building and put really cool signage.

It’s in a really good location for Reno, especially for our customer base. There are two churches down the road. There are three schools. There’s a big, huge gym. We’re right across from the brand new DMV that services all of Northern Nevada, literally right across the street from that. And then we get about an acre, it’s an acre of land. So, it’s terrifying. It’s like getting married for the first time, I’m guessing. You know, it’s equally terrifying and exciting.

Loren Feldman:
It’s interesting that you have a mentor in Chicago. You should introduce him to Jay.

Jay Goltz:
Yeah, I’d like to meet him. He sounds like a great guy.

Laura Zander:
Yeah, I should. Really smart guy. Old!

Loren Feldman:
What are you terrified of?

Jay Goltz:
There was more elder abuse there, Loren. Did you get that? Make her stop. [Laughter] I think your factory outlet will pay for the entire occupancy of that building.

Laura Zander:
And you saying that… to go back to Loren asked what I was terrified of—I’ve been journaling about it and meditating about it—I’m terrified of making a mistake, number one. And I’m terrified of just commitment, in general. We’ve got a 25-year loan on this thing, and I just don’t do well with commitment. But I think, mostly I’m terrified because Reno itself has gotten so…

Loren Feldman:
I hope your banker isn’t listening to this.

Laura Zander:
No, he knows.

Loren Feldman:
He knows you’re terrified of commitment?

Laura Zander:
Totally. Yeah, I’m very open and honest. The prices are so inflated right now that I think I’m most terrified that we’re purchasing this at the top of the market, and that everything is going to come crashing down in the next five years, and that we’ll have to get out. Doug, and I are always just terrified of: What if everybody decides to stop buying yarn? You know, what do we do then? Granted, it’s been almost 20 years now, so I guess it’s probably not going to happen.

Loren Feldman:
Wait, yarn’s been selling for a lot more than 20 years.

Laura Zander:
Yes. But I mean, for our business. They probably won’t stop buying it from us.

Jay Goltz:
The bottom line is, in 10 years, even if the market comes down a little bit, there aren’t a whole lot of people who own real estate and 10 years later go, “Oh my God, I can’t believe I bought this. That was so stupid.” There are certainly some where it goes bad, but most people are extremely happy, because the math works. Inflation works. Your costs keep going up every year.

Laura Zander:
Well, and that helped me with the 10 years, because I’m not uncomfortable when I think about it from 10 to 25 years out. Just like you said, the math works. It’s more of the three-to-five years. What if business tanks? What if we need to get out? So= being a little bit caged in, but that’s just personal fear. What also helped me is Jay, he just said, the increase in sales from the building should cover most of the mortgage or the cost. And if I can look at it that way, that helps me kind of rationalize and understand it. So I did some math the other day to take a look at how much principal we’d be paying. Right now we’re paying 50 cents a square foot for our space.

Jay Goltz:
Per month. In other places like Chicago, we go per year, so it’s $6 a foot per year. Okay.

Laura Zander:
Okay. So that’s what we’re currently paying, but the market is 80 cents a square foot. So what is that?

Jay Goltz:
It’s $9.60, which is similar to here.

Laura Zander:
Okay, and our lease at our current location is up in March. So realistically, our lease and our rent—our monthly payment—is going to increase by at least 50 percent anyway, which is about the same as the mortgage.

Jay Goltz:
And the key is, if you were renting, the rent would go up every single year another 30 or 40 cents a foot. That’s where the big thing is. Plus, the math on buying. You put 10 percent down because it’s an SBA loan?

Laura Zander:
Yes, yes.

Jay Goltz:
The return on investment—I’m living it. I’ve done this three times. And now, as I keep telling you, I’m 15 years ahead of you. I’ve done this three times in 20 years. The return on investment is unbelievable, because you have so little money in it. The return on investment is going to be in the 20-some-percent range. That’s what it’s going to be because of the low down payment.

If you had to put down 30 percent—if it wasn’t an SBA loan—it would still be good, but instead the return might be 16 percent. Instead, it could be 35 percent, and that’s exactly what I did. And I can’t tell you I was smart enough to know what I was doing with it. I just needed a building. But in hindsight… oh my God. 20 years down the road, you know, Huck’s gonna be a millionaire. Just from the building. Just from the building.

Laura Zander:
Yeah.

Loren Feldman:
Laura, I assume you’re going to be doing this. So this must be a building that someone could use as a distribution warehouse to ship online goods, right?

Laura Zander:
Yes, and that’s what we’ll be using it for.

Loren Feldman:
Right. That’s not going to stop happening. People aren’t going to stop looking for that kind of space anytime soon, I don’t think.

Laura Zander:
No, and there’s none in Reno. I mean, when we were looking, this was literally the only building in that 20,000-square foot range. And it just so happened to be a building that kind of fits us perfectly. Why am I terrified? I don’t know. Why do people get nervous before they get married?

Jay Goltz:
I know this will shock you, but some people don’t get nervous when they get married. I know that’s shocking. But there are people who just are happy.

Laura Zander:
That is shocking.

Loren Feldman:
I worry about those people.

Laura Zander:
Yeah, seriously.

Loren Feldman:
Paul, what’s going on with you? Anything new in your world?

Paul Downs:
Nothing like that. I should probably buy a building, but…

Loren Feldman:
Did you ever think about it?

Paul Downs:
Yes, I have thought about it, and it would mean buying in a location that greatly increases my commute, and it would be a hellish 18 months doing it. And I’m not looking forward to either of those things, so I haven’t. But our space is pretty satisfactory in many ways and has some irritating aspects. And it just hasn’t gotten bad enough that I want to do something different.

Other than that, business has been strong all summer. Our biggest issue has been trying to accommodate employees who are having life events that take them out of the shop for a couple days or a week or whatever at a time: babies, illness, military deployments, a lot of children’s mental health issues—and that’s something that seems to be going on all over the place these days. I don’t think there’s been a single week this year yet where we actually had all of our people all week, and that affects production.

Jay Goltz:
I’ve got the same problem. I have my wholesale business. I’ve got five people who answer the phones, and three of them have really horrible stuff going on in their life. The kids, the parents, the husband, the wife. There’s nothing you can do about it except try to be supportive. But at the end of the day, you don’t know who’s going to show up to work every day.

Paul Downs:
Yeah. What’s the answer, Jay?

Jay Goltz:
I think the answer is maybe to just have an extra employee to cover. I don’t know. What else are you gonna do?

Laura Zander:
That’s what we’re doing. It’s the exact same thing. So finally, we’re overstaffing, and we created a position that’s a flex position. We’ve hired a few people to be flex workers who know some of the jobs. Yeah, so same thing.

Jay Goltz:
In baseball, they call that a utility player.

Laura Zander:
Yeah, I like that.

Paul Downs:
That’s an interesting approach. I’ve been thinking about the same thing, the problem being that there’s such a wide range of different things that we do in manufacturing. One day you’ve got to fill in for an $18-an-hour guy, and the other one, it’s a senior project manager. It’s hard to imagine one person being able to actually provide that swing.

Jay Goltz:
Unfortunately, the result is a service problem. I went to Whole Foods last night. I’ve got to tell you, there were many shelves that were just completely empty. I went to Nordstrom, and the shoe department is decimated. Like, there’s a third as many shoes on the shelf as there used to be, and I asked the guy. He goes, “Yeah, we’re having supply chain problems.” It’s still out there.

Laura Zander:
Wow, so you’re shopping at Whole Foods and Nordstrom. So business is good?

Jay Goltz:
That’s how well I’m doing. I’m just showing off.

Paul Downs:
Well, just to jump in on that, we had put some deliveries down on our loading dock to be picked up—and these are large pallets, like 10 feet long—and XPO Logistics said, “We’re not going to pick them up. We’re only picking up stuff that’s four feet or less because we’re so backlogged in the terminal.” And I go, “Thank you.” But yeah, the trucking situation is really bad.

Loren Feldman:
Let’s take a quick break. I want to hear from our sponsor, Work Better Now. You guys should listen to this. Rob Levin is going to explain how to manage a virtual assistant. It’s good stuff. We’ll be right back.

[Message from our sponsor, Work Better Now]

Loren Feldman:
We’re back. A few weeks ago, we did an episode in which I asked Jay, Dana, and Diana to talk about how they track their financials. It was a great episode. I’d like to do the same thing with Laura and Paul. Laura, why don’t we start with you? You told us a few months ago that you actually really enjoy getting lost in your numbers. I’ve gotta think that’s somewhat unusual, especially for someone in an artsy business like yarn.

Laura Zander:
It’s funny, I was listening to that episode, and Diana said she’s “a freak about the numbers.” I’m like, “God, does that make me a superfreak?” Because Doug, obviously, is our software engineer. So every time I have a data question, and I ask it more than, say, five times, then it’s time for us to build a report so that I can just go look at that number whenever I want to. So I have all of these numbers. I have a business intelligence tool that I look at from a kind of repetitive standpoint. I look at my books. Somebody had said, “It’s important to look at every dollar that comes in and every dollar that goes out.” Well, I do that. So I look, line by line, at everything that we’ve spent money on every month and run through it.

And then I look at our days of inventory. I have reports that tell me what our margin is per sale and per vendor and overall. And then I look at the days of inventory that we have, and I shoot for 90 days of inventory, so I track that. Jay had talked about, in that previous episode, I’ve gotten burned and did a poor job of managing inventory really early on in the business. What I did is I created a high level budget for spending for inventory, since that is our biggest expense, and so I’ve divided all of our inventory up among a couple of different people. And each month, they report on, “Here’s how much we made in this area of the business, and here’s how much we spent.” And then throughout the year—like now it’s October—I’m like, “This is how much you have left for the rest of the year.” So I adjust it based on the sales and the forecasts and stuff.

Loren Feldman:
How do you do this, Laura? Do you track this through a dashboard that you look at every day? Or do you get reports once a week? Or what do you do?

Laura Zander:
No, I pull everything. So, yeah, I have QuickBooks Online, so I just go in and dig through the data. And then we have our own system that we built, so I just jump in there and take a look at it at any point, and then I have access to our database that has everything in it.

Jay Goltz:
It’s important to note, at this point: You don’t have a CFO, correct?

Laura Zander:
I do not. Right.

Jay Goltz:
If you don’t have a CFO, this is your job. You need to do it. If you do have a CFO, that’s something a CFO could be doing.

Laura Zander:
Again, listening to the episode that you guys were talking about, with the CFO, I probably am at that point, and I recognize that. Because I am out of my league when it comes to the forecasting, and, “Can we hire one more employee?” So I’m playing around, and I do all kinds of math. I figured out, if our sales stay the same as they are right now, blah, blah, blah, if we do this amount in sales, we can afford $67 more in wages over the next six months per hour. So I figured all those numbers out, but I don’t know if they’re right or not.

Jay Goltz:
Well, it’s not just being out of your league. It’s also just about: Can you be doing something better with your personal time? And the answer is yes. You can hire someone to do this. That’s the answer.

Laura Zander:
Yeah, I probably could. Or, I’m sure I could. So it’s just: Do I want to let go? Am I ready? And I think I’m getting to that point where I am ready, especially now that we have two manufacturing businesses and one e-commerce business. And like I said, my confidence is not there. But there’s part of me that just really wants to learn more about this, and I really want to learn this new forecasting tool.

You can ask me about any of our numbers. Ask me how much postage and delivery is as a percentage of our business, and I’ll tell you, “Well, right now it’s 11.7 percent. But two years ago, it was 10.2 percent. And it’s increased blah, blah, blah, blah, blah. And so what we’re going to do is, we’ve increased our shipping costs, and blah, blah, blah.”

Loren Feldman:
Do you have a handful of metrics like that, Laura—KPIs that you think are the most important things to keep an eye on?

Laura Zander:
I do, yes. But it’s not as formalized as it sounds, like other people have, because I have access to the data. After 19 years, it’s become ingrained. I know that I’m looking at days of inventory. I know that I’m looking at payroll as a percentage of sales. I know that I’m looking at cost of goods and shipping. And some of these metrics change over the years. Like right now, postage and delivery is a really important metric because those rates are changing so much. So if they increase by five or 10 percent, where do I need to shave five or 10 percent off?

And I need to figure out where there’s comparable savings. It can’t just be about percentages. It’s also got to be about dollars. Yeah, again, I’m a superfreak about the numbers, and I really love it. I’m reading a book right now about choosing your customer and how to compete with all the digital giants, and it’s all about data and what are your most profitable customers? And that helps me understand which yarns we should buy, what yarns we should carry, and what the strategy is.

Loren Feldman:
Take us through that. How does it help you decide which yarns to buy?

Laura Zander:
Well, I had a conversation with a vendor last night. I had dinner with somebody. And I was telling her, just as a basic number, “If we can’t make $5 off of a ball of yarn, then we’re not going to carry it, because labor costs have increased so much in Reno and shelf space has increased so much.” So I figured out how much it costs us to pull, pack, and ship a package. And there’s this threshold of how much gross margin or gross profit we need to make to make it worth carrying this item. And so with this vendor in the past, we had carried some of their lower-priced items because it made sense at the time. 10 years ago, it was all about selection. And now, for us here in Reno, I believe that it’s gonna be about margin. It’s not going to be about volume anymore. I want to increase the ticket prices and increase the margin on each ticket, as opposed to increasing the number of orders that we’re shipping out. Because each order is getting more expensive to ship out. So that changes my relationship with this vendor.

Jay Goltz:
I believe that everything you said applies to all three of us. Labor is going up for whatever reason that’s complicated, in that small businesses probably are not going to win the price game, and that we have to win the better quality, better service, better design game. And I believe all three of us are in that same business. I’m not chasing the super cheap. There are hotels, they want framed pictures, and they want it for 15 bucks. And if you go into a typical hotel, you’ll see why. The stuff is falling off the wall. I can’t make money on this stuff, and I don’t want to do it. And I think we all could chase cheaper business, but you can’t make money with it because of the labor costs.

Laura Zander:
No, and what I’m learning is that it’s just not as rewarding anymore. It’s not as fun, and maybe again, that’s a factor of our maturity and knowing that we’ve been in business for a long time. And so our goals are a little bit different. Now it’s about relationships. Now it’s about: How do we do a better job? We always say we don’t want to be the biggest. We want to be the best.

Loren Feldman:
Paul, how about you? How do you track your financials?

Paul Downs:
I could give you a condensed version of what Laura does. It’s very similar. I like a good spreadsheet, and I keep an eye on everything, and I don’t have a CFO. And I see that keeping those data series as being pretty much my main job. And my goal is to understand what normal looks like on a lot of parameters and what the red line looks like if something is deviating from what it usually does, and then to make decisions based on that.

I might be different, in that I have a different cash flow forecasting system than many people. I started writing this spreadsheet back in 2009, when I nearly went broke, that just allowed me to look at my running bank balance weeks and months into the future by putting in budgets for expenses and never putting in a budget for income, but just the actual income, and mapping it out to the weeks that I expect. And then I can just see, “Okay, how much money are you going to have in the bank?” And if it looked like we were going to run low on cash, then we started focusing on collections or sales or whatever. But it’s just an early-warning system that I’ve run continuously for… whatever it is, 12 years now. And that’s been useful.

Jay Goltz:
So here’s my question for cost accounting: Somebody comes in, or they go online, and they want a magnificent conference table. And you put it in your pricing thing—which I’m sure is pretty sophisticated—and the table’s $20,000. And in your system, the labor should be X percent and the materials should be Y. My question is: Are you tracking it? Are you having a work ticket go through that when that table is done?

Paul Downs:
Yes. We do. We’re very, very fortunate that one of my employees back before the recession, my partner’s daughter was a very, very talented database administrator. She sat down and just wrote us from scratch an ERP system that runs on FileMaker, but which includes all of that information. So we use a pricing spreadsheet that I wrote, which is a very complicated Excel sheet, to predict labor hours and material costs on any project. That gets entered into FileMaker. And then the workers report their hours that they worked on the job and the material purchases into each production item, and I can look at a P&L on a per item basis. And that’s useful.

The biggest takeaways are that some jobs go right for reasons you can’t predict, and some jobs go wrong for reasons you can’t predict, or you can’t really build into an algorithm. But on aggregate, it shows that our pricing model works. When we drill down, we can get a pretty good sense of what’s going on with any individual project.

Jay Goltz:
It also, I assume, gives you a handle on making sure that people are productive, because I know the learning curve I went through with framing pictures. I never ran a factory. You can have 10 people working in the back, looking busy, doing nothing. I mean, people can make an art out of it. I’m telling you, this sounds silly, but the biggest breakthrough in my business was I put a board up on the wall, and I said, “Okay, here’s how many pictures are due for Tuesday, Wednesday, Thursday,” and I put their names at the top. Every hour on the hour we did a call out, “What did you get done?” And throughout the day, you could see where you’re at.

And it changed my business, because up until then, somebody could look busy the whole day long and frame two pictures. And you get to the end of day, and you go, “What happened?” “Oh, it was a bad day. I had some bad molding.” Really? And it’s too late to do anything. Nobody wants to scream out, “I didn’t do anything for the last hour.” And I came up with this 30-some years ago, and I’m telling you, it is the absolute brains of my thing, because unlike the way you’re doing it, I’ve got a lot of small jobs. You’ve got one job. I’ve got maybe 50 for the same dollar amount, so I have to figure out how to keep score as the day goes on. And it made a huge difference.

Laura Zander:
We took your advice, Jay, and did kind of a hybrid in Texas. So we have a big, huge whiteboard now. And we’re like, “These are all the things that are due.” And then we have two different departments. We’ve got a production department and then a finishing department. We went through a painful process, because we thought that what we needed to do was have all of these 40 people report and record what they were doing per hour, like how many pieces per hour they were producing. And as it turned out, the production part of the process, it works really well for everybody to say, “Okay, I’m at 12.5 skeins dyed per hour,” right? So we set a standard, and we actually created a pay matrix and rolled it out about six months ago that says—basically, based on how complicated a product is versus how productive and quickly you can produce this product between those two things—the people who can produce the most complicated product and produce the most of that product are going to get paid the most.

And so we created this whole matrix that was very visible, so that people can now keep track at the end of the day of how many pieces they produce per hour. So we tried to do that on the finishing department as well, and realized that theirs needs to be a team goal. It doesn’t work very well for them to do that specifically, because there are multiple steps to the finishing. So now they have a team goal where they have to finish X number of products as a team per day, and more importantly, per week, to get those things out. Attach that to a pay matrix, and that has changed. So those are the metrics that I look at as well every day from a manufacturing standpoint: Are we hitting our productivity level, both from an individual and a team standpoint? And then you know, the money part of it kind of works itself out as a result of that.

Paul Downs:
Well, I think in our situation, we’re working on complex projects where everybody’s contribution is a little bit of the total product. And the products themselves have tremendous variation in size, complexity, cost, you name it. And so it’s not really feasible for us to be looking at, “Can you do 12 units of widgets an hour?” Because it’s never the same day twice. And what I tried to do is figure out, “What’s the overall revenue goal per month?” and communicate that to my people, along with the costs, and then show them the P&L and say, “Okay, here’s what we need to be doing in order to be a healthy company that can afford to let people who are sick go home for a few days” and try to tie it all together to something that means something to them.

I mean, I dream of having balls of yarn or something simple and discreet to deal with as a product, and it’s just not like that for us. So we have to back it up and make it more abstract, and that makes it harder to zero in on any particular thing. One of the things I’ve noticed after looking at this data for years and years now is that we could build the same table four times, maybe spread them a month apart, but it’s just the same thing, and you would end up with different build times every time. Because there’s external factors like: Did the machine break? Were the materials late? This tree has a bunch of knots in it that cause processing the wood for that one to be much worse than the other one. And we’re dealing with so much variation on a micro level that the only way to make use of the numbers is on a very macro level.

Loren Feldman:
Paul, are you saying that sharing the P&L numbers with your staff is enough to motivate them to work as hard as they can? Or are you paying them a bonus based on that? How does that work?

Paul Downs:
I have paid bonuses based on it, if it seemed appropriate. But I am counting on the idea that a company that is prosperous has more goodies to give out than one that isn’t, and that the P&L is a pretty good measure of how prosperous you are. And so my people are aware that they’re enjoying a work experience, a pay level, and a set of benefits and privileges that they haven’t seen in any of their other work experiences, and that the profitability is the way to support that.

If you drill down much, much more granular than that… Like, I have in the past tried to do more formula-driven bonusing and found it to be unworkable, because there are a lot of things that drive profitability, other than just, “Did we produce?” So I mean, if I have to make investments in machinery, or repairs, or whatever, that’s going to affect the bottom line. And I would rather have the staff be aware of that by talking about the entire P&L rather than just a production goal.

Jay Goltz:
So what he’s saying is—and I’m on the exact same page—it’s not about motivating. It’s about, if you have good employees, they want to do a good job. That’s all. They want to do, a good job. And if they understand what they’re doing, they’re going to work with you to do a good job. Otherwise—

Loren Feldman:
But Jay, you had those good employees, and you still felt the need to put up a sign to make sure they know that they’re tracking what they’re accomplishing on an hour-to-hour basis.

Jay Goltz:
Yes, that’s for the 10 percent that aren’t great employees, or who need to know that we’re looking at the numbers every hour on the hour, and you better get the stuff out.

Laura Zander:
Yeah, well, and realize, too, Loren, again, going back to being an athlete, you run faster if you know what your times are. I mean, that transparency is really important to a lot of people. But I think …

Loren Feldman:
But if I understand what Paul was saying, he doesn’t have the ability to do that on an hour-by-hour basis. He has to take a more macro approach, as he put it.

Jay Goltz:
Well, because he’s working on projects that take a week. I’m working on projects that literally take 40 minutes. So it’s just a different animal.

Laura Zander:
Well, and we found even within our own business that half of the team can do that on an hourly basis, but the other half of the team needs a more macro goal. So even within the same business, the micro versus macro might be different, depending on where you sit and what your job is.

Jay Goltz:
I think the point is, if you do this improperly and you start to try to put some bonuses in and you do it badly, you’ll end up with more negative consequences than positive. So if you have three choices: do a really good plan that works? Great. Do a bad plan? You’re better off with no plan than a bad plan, because people start getting mad. “Oh, how come he’s getting a bonus? Because I’ve got the harder job.” You have to really do it properly, and in some businesses it’s easier to do that than others.

Paul Downs:
I agree with that.

Loren Feldman:
Paul, can we go back to your cash flow analysis? You said that that’s something that you think is probably different from Jay and Laura’s businesses.

Jay Goltz:
No, not different from mine. I just happen to have done this yesterday. I’ve got a new CFO I’m training, and I did the math. I haven’t done it in years. 23 percent of our sales were in the first quarter, and 27 percent are in the last quarter. So there’s a pretty big cash flow difference, plus the fact that we get rid of inventory in the last quarter. We’re tight on cash parts of the year, and other times of the year, it’s just flush. So we do have to watch the cash flow.

Loren Feldman:
Paul, did I get that wrong? Do you think you do something different than most businesses?

Paul Downs:
Well, I think that I can do something different than most businesses, and so I do it. The things that make it feasible for me to run the sheet the way I do—and unfortunately, this is a podcast, so we can’t just take a look at everybody’s system—but we have a limited number of transactions per day, and that makes it relatively easy to track the income. We have a finite number of outgoing transactions too. So my bookkeeper works in QuickBooks, but then she also replicates everything she does in this spreadsheet, because what QuickBooks is really bad at is cash flow forecasting.

And so I want to be able to see, literally, what is my bank balance on every single day for as many weeks in the future as I feel like? And my system allows for that. But if I were doing a business where income was hundreds of transactions or thousands of transactions, the manual entry aspect of my system would become unusable. And now I look at it multiple times a day. I never don’t know exactly where we are financially, in every respect.

Loren Feldman:
What exactly are you looking at multiple times a day?

Paul Downs:
If you could see all the spreadsheets I keep, I keep track of everything you could possibly measure.

Loren Feldman:
Do you have a favorite metric?

Paul Downs:
The metric that I found that is pretty interesting and that you can use to compare businesses to each other is revenues per employee—and particularly, in manufacturing businesses. Let’s say the world of small domestic manufacturers, if you’re not doing significant outsourcing. The range of answers I’ve gotten when I’ve asked company owners, “Okay, what were your revenues? How many employees total?” Usually, that’s going to be in the $150,000 to $200,000 per year.

Jay Goltz:
You know, I’m doing it in my head. I mean, you say that, and that’s just where mine’s at. That’s funny. You’re right.

Laura Zander:
I’m going to do that, too.

Paul Downs:
$150,000 to $200,000 is a healthy number that’s not an indication of terrible trouble. Different kinds of businesses—like software businesses, consultants—I mean, that can get up to $300,000 or $400,000 a head. But it’s pretty hard to manufacture your way past $200,000 a person, unless it’s very highly automated manufacturing.

Laura Zander:
And does that include marketing people and office people as well?

Paul Downs:
Everything. Everybody you pay, full-time equivalents. Because if you just look at it as shop floor, then you’re fooling yourself. Like in my situation right now, we’re relatively heavy in the office, because I’m paying more for marketing. I’ve brought that in-house. And I have reasons, but it affects revenues per employee. Now, one thing I’ve known for certain is that if you meet someone, and you do the math, and their revenue per employee is under $100,000, that’s trouble. They are in trouble in ways that they may or may not understand.

Jay Goltz:
Especially since the minimum wage has gone up. Yeah, I couldn’t agree with you more. With minimum wage going up—well, I don’t know if it went up everywhere, but in Chicago, it’s $15 an hour. You can’t take in $100,000 per employee and make any money.

Laura Zander:
That’s a crazy number. That’s so helpful and interesting. Do you include yourself in that, Paul?

Paul Downs:
Yeah, I do.

Laura Zander:
Okay.

Paul Downs:
Because I’m here working all day. Like if I was just at home, opening my mail and cashing checks…

Jay Goltz:
What if you were sitting at your business and just doing podcasts and stuff?

Paul Downs:
I’m sweating right now. This is work.

Laura Zander:
So, no, Jay, you don’t count.

Jay Goltz:
Okay, that’s what I wanted to get to.

Paul Downs:
What I find is, the Karen Clark Coles of the world are fortunate, but far between. And I meet a lot of business owners who are on the opposite end of the spectrum. I just had lunch with a guy yesterday who’s got a two-person painting company. And I asked him, “Okay, what did you bring in last year? How many people have you got?” “Well, it works out to like 95,000 a head.” Somebody is paying for that. It’s usually the employees are poorly paid, and the owner isn’t making any money. And then when there’s that precarious of a financial situation, then there’s staff turnover. You can’t afford to train. It’s just a sign of trouble. But it’s the easiest way to identify a situation which is likely to be unfavorable. And then if you’ve got a business where you’re pulling in $250,000, and you’re not outsourcing—again, if you outsource, that’ll shift the numbers—but if you can get that much revenue per person and get the work done, you’re probably doing pretty well.

Jay Goltz:
Well, to put meat on the bones, it’s simple. If you’re paying $15 an hour, that person—by the time you pay FICA and health insurance—they’re clearly costing 40 grand. So if you’re only taking in $100,000, your labor is 40 percent. Now, maybe if you’re a landscaper, that could work, because there’s no cost of goods sold. Maybe. And maybe even painting, there’s the paint cost. But if you’ve got any kind of material costs, how do you spend 40 percent for labor and have anything left?

Paul Downs:
Well, you don’t. That’s why I say it applies to manufacturing businesses. So if you start applying it to different businesses, all you have to do is think about it. Why would $100,000 a head work for this particular business? As you say, if there’s no material cost, or there’s no rent, or there’s no whatever, maybe. But it’s a quick way into thinking about what’s going on in a business that will lead you to useful questions.

Laura Zander:
What do you guys pay—both of you, Jay and Paul—what’s your payroll as a percentage of sales? Is it in the 20’s?

Jay Goltz:
No, mine’s in the 30’s.

Paul Downs:
30’s, yeah.

Laura Zander:
Wow. Okay.

Jay Goltz:
But keep in mind, I buy direct on everything. My material cost is lower because I’m doing the literal cutting out the middleman. But I give great service because I’ve got better people, so customers are getting a better value proposition because maybe they’re paying the same as somewhere else, but they’re getting a much more qualified person there, because I keep people around. My average person has been here 11 years.

Paul Downs:
Yeah, and actually, one of the things that I can say is that I can give you an answer for every single year going back to 2011 on exactly that: COGS and labor. And if it’s below 30, we’re doing okay. And if it’s more—and it has been more—it’s bad. So I have a pretty good idea of what normal looks like. And if I’m wondering whether something’s going on, I can usually go back and find some data about it and say, “Okay, rather than just my own fears and memories and suspicions, here’s some actual numbers.”

And that’s useful in talking to the employees as well. Here’s another way: I track everybody’s labor hours. How often are they working? How do they compare to the other ones? My manager was in my shop last week, and he’s like, “This one guy, this new young kid, he’s never here.” It wasn’t true. He was there quite often. So I was like, “Okay, let’s have a discussion about facts. Why do you feel he’s not here when he is?” And then we’re dealing with the actual problem rather than just a suspicion.

Loren Feldman:
Laura, did you figure out what your revenue-per-employee number is?

Laura Zander:
It’s around $130,000, which is interesting, because the e-commerce side of it is closer to $200,000. But the manufacturing, we’re still in rebuild mode. So I know and we know, that we still have a lot of new people, because we’re training, that we can get, we’re gonna get to $150,000 no problem. And that’s the plan.

Loren Feldman:
My thanks to Paul Downs, Jay Goltz, and Laura Zander. As always, thanks for sharing guys. Really appreciate it.