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Financial Fix

May 1, 2000
7 min read

Derek Reijnen uses monthly staff meetings to analyze spreadsheets for company performance.

 

Derek Reijnen started out like many remodelers, with a talent for design and construction but weakness in business management skills and financial planning. At the end of the year, he would look at his numbers, wondering if he’d made any money. "Whatever jobs came our way, we called that our sales," he says. "What ever jobs we produced, we called them our produced jobs. I think that’s pretty typical."

Although Reijnen had hired a financial manager to provide some financial stability, he soon abandoned his company’s passive approach to profit in favor of developing a strategic plan. He realized that there was a real difference between fulfilling the company’s accounting functions and actually doing financial planning and management.

Sharon Kane, the company's financial manager, meets with Jim Ray (left), product development manager, and Cliff Buckwater (right), production manager, to collect financial information.

 

"It’s a strategic difference," he says. "You can passively fill out all your accounting info, you can track your jobs, but if you’re not strategically thinking about how all this info actually affects the company and its profitability, then you’re not really using it the way you should."

At the time, the company was using Master Builder, a real-time construction management software package. The system features integrated estimating, scheduling, project management, equipment management and job cost accounting. Master Builder has many construction-specific features that Sharon Kane, Reijen Co.’s financial manager, says can’t be found in other software packages, such as direct costs and overhead.

"No one ever thought to break these things out," says Kane. "To me, that’s the glory of Master Builder." But the software program had some shortcomings that Reijnen Co. could not ignore. For a company that uses 250 different cost codes, the package lacked the type of Excel spreadsheets the company used to analyze each code. In addition, the company uses a more complicated sheet for estimating than Master Builder was geared for. To supplement the software and to help other employees understand more complex financial concepts, Reijnen and Kane customized a set of Excel spreadsheets.

 

Hitting Your Mark Up
"When a lot of people talk about this, they get hung up on what’s the appropriate mark up," says Derek Reijnen. Appropriate mark up is whatever the number needs to be for the size of your company and the overhead you’re running.

For example, because smaller jobs tend to have more overhead, companies with an average job size of $6,000 tend to mark up their jobs 65 or 75 percent. Because they have less overhead to account for, companies with an average job size of $500,000 mark up their jobs up significantly less, according to Reijnen. "This is generally true [industry wide]," he says.

Reijnen’s mark up, which is variable, is whatever the finance department says the jobs need to be to support the amount of overhead projected based on the sales volume. "The cool thing about this is a lot of this has absolute nothing to do with how big or how small a company you are," he says. "It all based on average job size."

What Reijnen found was that most of the spreadsheets answered specific questions. "But not all of them did, so we decided we would start with the questions and then develop the spreadsheets to support the questions," he says. "It was kind of an evolving thing where it was a really good way of making something that seemed hard to grasp into something we could all relate to."

Reijnen and Kane developed a list of six questions and built a spreadsheet around each.
1. What mark up/gross profit should sales target for the rest of the year?
2. Where are we on over/under billing and what gross profit is remaining?
3. How are our projected departmental overhead budgets doing?
4. What is our 12-month volume projection based on contracts?
5. How are direct costs allocated this month?
6. Will our income support our overhead?

Every month, Reijnen and Kane hold a meeting to collect financial information from these questions and spreadsheets. Kane examines the data and performs a "cost to complete," which compares gross income and direct costs with budget. Using the spreadsheets and industry benchmarks of 75 percent for direct costs, 15 percent for overhead and 10 percent for profit, Kane can predict where the company will come in at year-end.

Because Reijnen Co. is organized by departments, Buckwalter reports his department’s financial information to Kane.

 

At the company’s monthly meetings the staff also reviews the effectiveness of the questions and spreadsheets.

"It does evolve for us, and the support spreadsheets are evolving over time," says Reijnen. The questions that he and Kane pose on a monthly basis may not be the exact questions another company would want to ask, but Reijnen believes his six-question system for financial management can work for any company.

"There’s a lot of things that have to be in place to have those questions really work," Reijnen says. To answer the six questions properly, Reijnen has set up certain systems and has organized departmentally. The sales department is distinct from production, production is distinct from finance, and finance is distinct from estimating.

 

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Because the sales department is responsible for providing the finance department with raw data for projected sales for the next 12 months, there must be a rating system that takes the company prospects and evaluates them in terms of their probable success. The department needs to start with a projection that tells the company how much it’s going to produce in sales that year.

"That’s a hard thing to do, but it’s absolutely essential," says Reijnen. "If you don’t do that, then you’re simply an opportunity-based company and your profit will be based on the opportunities that come your way." Setting a sales projection for the year and sticking to it is essential because the finance department needs to create an overhead budget that sticks to the sales volume, according to Reijen.

The six questions and spreadsheets Reijnen and Kane developed help Buckwalter and Ray to manage their departmental budgets.

 

"What’s different now is the financial information we get once a month is a really dynamic tool that affects all of our departments," says Reijnen.

"Ultimately, the whole thing is about making profit, and profit is a number," says Reijnen. "You’ve got to get really good at the numbers game, so that you can actually predict from year to year and have a predictable and constant profitability. That takes strategic planning."

Asking the Right Questions

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