Category Archives: Control Systems

When to Add a CFO

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From the Ask Tom mailbag –

Question:
Our company is thinking about adding a CFO to manage our accounting. We are growing. At what point do we need a CFO?

Response:
As companies grow, this is the normal maturation of the most important administrative function, keeping track of the money. (DROOM – Don’t ever run out of money).

When I look at levels of work in accounting, here are some of my guidelines.
S-I (1 day to 3 months timespan). This is all the transactional stuff, vouching invoices to be paid, creating invoices to customers, data entry of timecards, materials to work-in-process. This would also include reconciliation of transaction documents to transaction schedules (as entered).

S-II (3 months to 12 months timespan). These are higher order transaction functions, like payroll (especially payroll with a 401k plan). Also longer period reconciliation routines like monthly bank recs or monthly credit card reconciliations, routine journal entries. High S-II approaches that of a full charge bookkeeper.

S-III (1 year to 2 years). Emerging (low) S-III would be a full charge bookkeeper, where transaction activities have impact on the EOY (end of year) compiled financials (this requires a minimum 13 month timespan). This level also creates the transaction systems to record depreciation entries, simple inventory management, over and under billings to WIP. This would include job cost systems where project accounting likely survives a fiscal year. Hi-S-III would be a controller level.

S-IV (2 years to 5 years). This is an integration role (CFO) which would include software and accounting administration of more complex transaction activity, like bill of materials inventory management, complex work-in-process, enterprise software integration. S-IV would be accountable for modeling cash flow based on 36 month trailing stats overlaid to macro-economic trends to determine credit facilities (lines of credit, term loans) to cross periods of economic contraction. Analysis at this level would provide financial coaching to S-III department managers related to metrics of labor, materials, consumables, capital equipment, short and long term budgeting.

What Did You Train Them To Do?

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“But, my team never comes up with any constructive ideas to solve the problem,” Edward explained. “I ask them to think about the problem at hand and they just sit there, waiting.”

“How long has this been going on?” I asked.

“Not long after I arrived at this company. As the incoming CEO, I was briefed about this executive team. I was told they were bright, action oriented, made solid decisions. But, that’s not what I see. I wouldn’t call them dolts, they would never have gotten this far, but day to day, I feel like the quarterback who has to constantly scramble.”

“How have you contributed to the problem, meaning, how have you contributed to the team’s lack of constructive solutions to problems?”

“Now, don’t think you are going to pin this on me. I didn’t hire these people, they were here when I arrived. I am the same person I have always been,” Edward was firm.

“I want to take your description at face value, that at some point this executive team was bright, action oriented and made solid decisions. If they were once that way, what changed?”

“You are still looking squarely at me,” Edward replied.

“You’re the only one in the room,” I waited. “Think back to your early interactions with this team, tell me what happened in the first couple of meetings.”

“Well, the first couple of meetings, I was just sizing them up, seeing who was strong, who was weak, and where we could make improvements. I call it diagnostic work.”

“And, what was your diagnosis?”

“There must have been a reason I was hired in to take over from the outgoing CEO. This team was okay, but needed some firmer guidance and direction.”

“And, if you see those first few meeting as a training session, led by you, what were you training them to do?” I wanted to know.

“They needed to look more clearly at their mistakes and listen to me, to help guide them to make better decisions.”

“And, isn’t that what you have now trained them to do?”

Service System Capacity

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From the Ask Tom mailbag – Related to Integration is a Fancy Word. The illustrative example described an imbalance of systems in a manufacturing model, where there is a build-up of finished goods inventory (unsold).

Question:
Can you provide an example of an anemic sales function in a service industry. What would you get instead of an inflated inventory?

Response:
Thanks for the question. In a service industry, say you have 20 trucks, 20 technicians, optimized to average three service calls per day. The daily average capacity is 60 calls.

If sales only sells 55 average daily calls, you have excess unsold capacity of 5 service calls. You may not even notice. If the average drops to 50, you may begin to notice, and so do your service technicians. How long does it take a service technician to complete two assigned service calls vs three assigned service calls? The answer is 8 hours, no matter which. Parkinson’s law – work expands to the time allotted.

This is functional integration work, to monitor the capacity of each function, to make sure the impact of one function doesn’t outstrip or adversely impact the capacity of its neighboring functions.

In this service example, the math is pretty easy, 20 technicians x 3 calls = 60. Sometimes the service work has more subtle variations where the math is not so clean. That’s why system capacity makes for fascinating study.

Span of Accountability (Control)

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From the Ask Tom mailbag –

Question:
I’ve been following your blog since you spoke at an event at our office in 2015. I see a lot of posts discussing timespan and organizational structures. What’s your view of “span of control” as it relates to organizational structures? The military has a 3-5 subordinate unit rule of thumb which makes sense for matters of life and death. Yet, I’ve seen organizations with people managing 20+ direct reports. This seems to be on the other end of spectrum and untenable not just from a managerial perspective but from a human/leadership perspective as well. Your thoughts?

Response:
I am not a military expert, so I am not certain of military rules of thumb related to span of control. Any readers familiar can jump in the comments.

Before I leap in, however, I want to re-frame the question. It is not a matter of management or control (even span of control), it is a matter of accountability. Here is my re-framed question – How many people can one manager be accountable for?

Elliott acknowledged a concept know as the Mutual Recognition Unit (MRU) which addressed your question. How many people can a single manager have on the team and remain an effective manager?

It depends. The maximum number Elliott placed was around 70. Beyond 70, it is likely the manager would begin to lose effectiveness. You have to remember the primary function of a manager is to bring value to the team’s problem solving and decision making. I can already see your skepticism through my internet connection.

For a manager to be effective with a team of 70, the work must be repetitive with low variability. The higher the variability in the work, the fewer allowable on the team.

Take a high-volume call center where customer support representatives respond to the same phone calls day after day. One supervisor may attend to teams as large as 70 before losing track.

Take a US Navy Seal team. How many on the team? I am thinking six. Why? Because the work is always variable with high levels of risk. One manager to a team of six.

So, it’s your organization. How do you assess the level of variability in the work? How much is repetitive? How much risk if the team gets it wrong? These questions will guide you to your answer.

Don’t Fix the Defect

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“But, it’s like pulling teeth to get them to change the way they have been working. They get started, but after a couple of days, things are right back to the way they were before.” Matt sighed one of those Manager’s sighs. “I just wish my team was more disciplined.”

“Matt, discipline is nothing more than routine. Discipline isn’t harder than any other way of getting things done; it’s just not what you are used to.”

I spied a workroom on my way in. It was a small room with some simple tools and a work bench, good lighting. It was where people took things that needed fixing. Not broken things, but rather, product defects. The seam on the unit didn’t line up quite right; there was a burr on an edge. Rather than documenting the defect and looking for a solution, the team had, over time, assembled this little “fixing” room.

“Tell you what, Matt. Hide the tools and put a padlock on the room.” I could see his eyes grow wide. “Then, have a meeting and tell everyone that the fixing room is off-limits for 21 days. During that time, have meetings twice a week to talk about the new defect-documentation process. After 21 working days, you should have a new routine. Discipline is just a different way of getting things done.”

Matt was nodding, “So, after 21 days I can take the padlock off the fixing room?”

“No.”

Pulling Bad Product

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“We have a problem with consistency,” Donna said. “I think everything is going okay and then boom, we get hit with a warranty event that uncovers a whole batch of bad product. I have two people doing random inspections prior to shipping. Still, mistakes get through. I might have to add more inspectors, check everything, just to keep bad product off the shelves.”

“What do you do with the bad product?” I asked.

“Well, we can’t sell it and we can’t melt it down, so we throw it away,” replied Donna.

“Do you use bad product to isolate the problem production area?”

“Oh, we know the three areas where we have problems, but rather than pull bad product in three places, I thought it best to inspect just before shipping, so we can pull all the bad product at the same time, no matter where the problem occurred.”

I winced. “Donna, is the purpose of Quality Control to pull bad product, or to identify the problem and fix it? Consistency doesn’t come from pulling 3 percent of your production. Consistency comes from fixing your system.”

Don’t Fix It, Prevent It

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Most managers got where they are being good under pressure, reacting quickly without flinching in the face of adversity. Most managers get their juice operating in the red zone.

The best managers are most effective by sensing pressure before it builds, preventing blow-back that requires extraordinary effort (and overtime). They don’t flinch because they meet adversity early on when there are lots of options. The best managers stay out of the red zone through planning, anticipating, cross-training, delegating and building bench strength in the team.

It is not extraordinary effort that makes a great manager. It is ordinary effort looking forward. It is not heroically fixing a catastrophe, but creating a sensitive feedback loop that prevents the catastrophe in the first place.

What’s the Benchmark?

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“So, what do you think?” asked Lenny. “How do you think my team is doing?”

“I don’t know. How do you measure how you are doing?” I replied.

“That’s the thing. We aren’t sure what to measure against. We got some studies of companies that are sort of like us, but the benchmarks they use seem so different. They just don’t make sense.”

“Two things,” I said. “Pick what you think is important. Start measuring now.”

“But, what do we measure against? How do we know if we are doing okay or not?”

“Measure against yourself. So many companies chase each other’s tail around and end up back where they started. Figure out what is important to your customer and measure that. That’s all your customer cares about. What else matters? Measure the second day against the first day. Measure the third day against the second day. Pretty soon, you will see a trend. Before you know it, you will have one year’s worth of data. Start measuring now.”

When Times are Good

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“You look comfortable,” I said.

“Things are going really well,” Jordan replied. “The market is good, new customer count is up, year over year revenues are positive. Yes, things are comfortable.”

“I noticed your accounts receivable ratio to new sales is above your threshold limit. And, that you rented a new warehouse to store some slow-moving inventory. Your revenue-per-employee head count is way down over the past six months. What gives?”

“Hey, when times are good, those things happen. More revenue, more accounts receivable. We set the ratio threshold during the last recession when things were tight, so it’s no big deal. And, yes, we rented another warehouse to give us more capacity. The new warehouse gives us a buffer so if we get a spike in sales, we can cover without having to increase production. But, you are right. I am a little troubled by our revenue-per-employee. It just seems it takes more people these days, and wages are increasing so our revenue-per-payroll dollar is even worse.”

“Jordan, when things are tight, we pay attention, we measure, we make moves. We don’t make our biggest mistakes when times are tough. We make our biggest mistakes when times are good. A little success can create a whole lot of overhead.*” -Tom
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*Homage to Red Scott.

Cash Ain’t Cash Unless It’s Cash

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“Where’s the money?” I asked.

Luis squinted. “What do you mean, where’s the money?”

“Look, you asked me to help you straighten out this mess. Where’s the money?” I repeated.

“We have a cash-flow problem, there isn’t any money,” Luis replied.

“Yes, there is a cash-flow problem, there is always a cash-flow problem. Luis, the first resource a manager has to manage is cash. But before you can manage it, you have to find out where it is. Sometimes you think you know where it should be, but if that’s not where it is, you can’t manage it.

Sometimes your cash is tied up in a machine. Sometimes your cash is tied up in unbilled work-in-process. Sometimes your cash is tied up in Accounts Receivable. Once you find out where your cash is, only then can you manage it. So, where’s the money?”

A raw nerve was struck. Luis shuffled some papers on his desk. “It’s here,” he said, pointing to the third column in his A/R aging report. “It’s over 60.”

“Well, now we know where it is, we can manage it.”
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Registration for our online program Hiring Talent – 2016 is CLOSED out. No worries. We will offer another class the first part of March.
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Today’s post was inspired by a quote from the late Red Scott, “Cash ain’t cash unless it’s cash.”