John leaves his present company. He buys a truck and has it wrapped with his new company’s name: John’s Heating and Cooling Co. He makes some contacts with his friends and neighbors as well as some past customers. He knows he has virtually no overhead, and he knows how much he can accomplish in a day, so he bids accordingly. Everything is going great until suddenly … there’s too much work for John to do it all by himself.

He doesn’t see it as a problem. He just hires another worker. But then, his wife gets sick of doing all the administrative work for him, and she’s tired of him working out of their house, too. Therefore, he has to rent a building to accommodate his office and shop space. His financial statement still looks good from his early success, so he goes to a bank to borrow the money to cover this expansion. He has to hire a secretary to replace his wife who wasn’t paid, and he has to equip the office with computers and other necessary equipment and supplies in order to operate this growing business. Because he is so busy with the expansion, he doesn’t realize that his new employee doesn’t complete as much in a day as he did. Though he is losing money on each job due to the increase in labor, he feels everything is OK, since money is still coming in.

On his own, when he completed a job, he wrote up the invoice, handed it to the customer, and waited until he was paid. Now, his employee calls in the information from the job, the secretary types up an invoice when time allows (hopefully not more than a day or so later), and mails it to the customer. The customer receives the invoice and puts it in a pile with all the other bills waiting to be paid. The cash isn’t coming quite as fast. Because John is so busy working and running the business, he doesn’t take the time to revise his pricing structure. Before long, the money John borrowed from the bank has dried up and creditors are hounding him. Eventually, he realizes it isn’t working, and he closes his doors.

Perhaps a couple of simple changes could have saved John’s Heating and Cooling Co. The first would have been to implement a job costing system. This would have forced him to analyze the cost on every job. By doing this cost accounting, John likely would have been able to rectify the two problems that caused his demise.

1. Overall production rates had dropped when additional people had been hired. Not because they were slow or lazy; they just didn’t accomplish as much in a day as John. And let’s be honest, they didn’t have the same “skin in the game” as John did or the type of onboarding experience that creates loyal employees.
2. The cost accounting would have made it clear to him that his overhead had increased significantly from the days of operating out of his house and having his lovely, unpaid wife working all day for him.

It should be clear from this example that the most critical moment was the one in which John went from being a wage earner to becoming a businessperson. Failing to take into account all of the ramifications of that decision is one of the main reasons for the high turnover rate in our industry.

Publication date: 6/24/2019

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