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					Article 34



                                       Are We Making
                                         Money Yet?
      By learning the costs in each of her messenger service’s transactions, Claudia Post
          transformed herself from sales addict to CEO—and not a moment too soon
SUSAN GRECO

I N DECEMBER 1994 CLAUDIA POST, THE
founder of Diamond Courier Service, did
                                                credible,” says the admiring owner of a
                                                Florida-based courier company.
                                                                                                became chronic. By the latter part of the year,
                                                                                                Post was helping her staff shuffle the ac-
something that offended every cell in her                                                       counts payable and decide whom to pay and
salesperson’s body: she began shedding                                                          when. Briscella, her new sales manager,
business she had already sold. While her                Diamond Courier                         who’d previously worked for Federal Ex-
messengers delivered gift baskets of fruit                 founder Post                         press, had begun to complain that he couldn’t
and candy, Post was delivering sour news                                                        get accurate operating results. “I’d hear
to some of Diamond’s customers: “After
                                                         asked a friend to                      things like ‘We either broke even or made
some careful analysis, I’m forced to make                   examine the                         $6,000.’ That,” he says, “drove me crazy.”
a difficult decision—I have to relinquish               company’s books.                        Despite Diamond’s continued growth, it
part of my business with you.” The chief                                                        wasn’t much longer before Post had to re-
executive and her sales manager had                       After a cursory                       sort to selling her jewelry and liquidating
drawn up a list of clients to visit. Arthur                look, he said,                       long-held stocks from her Merrill Lynch ac-
Andersen, the Big Six accounting firm and              “You’re headed for                       count to generate the cash she needed to pay
one of Diamond’s earliest customers, was                                                        her employees. Of course, the more her cash
on it. So was Montgomery McCracken, a                        the rocks.”                        problems mounted, the more Post, the con-
prominent Philadelphia law firm—Post’s                                                          summate salesperson, wanted to get out and
own law firm, in fact. She relished making          In 1993, its third full year, Post’s com-   sell. Yet she increasingly felt chained to her
those calls about as much as she enjoyed        pany had $3.1 million in sales. By then Di-     desk by the by-then nearly daily crises. One
selling her personal investments, which         amond employed some 40 bike                     day an anxiety attack, which she mistook
she also did in order to save her company.      messengers and 25 back-office staffers and      for a heart attack, sent her to the hospital. As
    “I can’t tell you how painful it was,”      provided steady work for 50 independent         she left, one of the office employees called
Post recalls. “I mean, these customers de-      drivers. There was never any ambiguity          after her, “Don’t you die on us!”
pended on me.”                                  about Post’s own role in the business: mas-
    The timing of these unsales calls was       ter networker and fearless cold caller—the
particularly ironic in that just a few months   sales whiz every struggling young com-           At the center of Diamond
earlier, the Philadelphia office of the Small   pany needs. Post put the “star” in start-up,    Courier's operations today is
Business Administration had handed Post         and she was happy. “I was busy having a
her first business award—for civic in-          great time selling. Cash flow? Profit before    the vehicle courier service,
volvement, job generation, and fast             taxes? I didn’t know how to figure out any       supported by dispatchers
growth. She deserved the award. She had         of that stuff,” she says. She was a selling          and augmented by
started Diamond Courier in August 1990,         machine. And to be sure that she could
determined to outperform the downtown           keep on selling, Post recruited a former            downtown walkers.
courier company that had just fired her         colleague, Tony Briscella, to step into the
from a sales position. Post plotted Dia-        sales manager’s role at Diamond.                   Post didn’t die, but Diamond Courier
mond’s sales growth on a straight trajec-           It was early that year, however, that       nearly did. By the spring of 1994 the com-
tory, and it took her only 17 months to         symptoms of underlying problems in the          pany was undeniably sick, and Post re-
achieve her first objective, $1 million in      business first became apparent. The usual       members thinking, “Here I am with a
sales. She nearly doubled that volume dur-      start-up cash crunches grew more serious        company that’s doing $3 million plus, and
ing the next year. “What she did was in-        and arrived more often until eventually they    I have no money. I’m working a gazillion

                                                                     1
ANNUAL EDITIONS

                                                 BIKE DELIVERY: PROFIT AND LOSS
                                                            Post's imagined per-job P&L...
                           Revenue                                                                         $4.69
                           Messenger's pay*                                                                $2.35
                           Overhead and profit*                                                            $2.34
                                                        ... and the actual P&L she uncovered
                           Revenue                                                                         $4.69
                           Messenger's pay                                                                 $4.23
                           Overhead (direct and allocated)                                                 $5.01
                           Profit (loss)                                                                  ($4.55)
                           *Approximate

                                       One-year financial results for the bike-messenger profit center
                           Revenues (on 71,658 jobs at $4.69/job)                                       $336,000
                           Direct labor (messengers)
                               Wages and commissions                                                    $277,000
                               Payroll taxes                                                             $26,000
                                Gross profit                                                             $33,000
                           Direct   overhead1
                               Dispatching                                                               $39,000
                               Customer service                                                          $40,700
                               Workers' comp insurance                                                    $6,800
                               Miscellaneous office expenses                                              $5,000
                               Telephone                                                                 $10,000
                           Allocated    overhead2                                                       $257,655
                               Total overhead                                                           $359,155
                                Profit (loss)                                                          ($326,155)
                           1                                                           2
                            Includes all costs directly attributable to bike deliveries. Costs not directly linked to bike deliveries but
                           apportioned according to level of actitvity—number of bike jobs, for example.

hours a week. There’s something terribly              sides bike-messenger services, the company                   didn’t know because she was operating on a
wrong here.”                                          was into driver deliveries, truck deliveries,                set of reasonable but unexamined assump-
   But what? Desperate and scared, Post               airfreight services, a parts-distribution ser-               tions. She assumed, for instance, that if she
asked a friend in the industry to examine             vice—and even a legal service that served                    kept selling and priced her services at market
her books. “Claudia,” he said after a cur-            subpoenas and prepared court filings. Al-                    rates, she would build a profitable business.
sory look, “you’re headed for the rocks.”             though all the businesses shared some com-                   She assumed that growing volume would
   What had happened to this growth com-              mon resources, each had its own line                         generate economies of scale. She assumed
pany and its founder?                                 workers, manager, and administrative-sup-                    that if she took good care of customers, the
                                                      port person, as well as its own steady custom-               business would take care of itself. She relied
                                                      ers and unique pricing and billing practices. In             upon those and other assumptions because,
T   HERE WAS NOTHING WRONG WITH
the service that Diamond provided to its ex-
                                                      that respect, Diamond wasn’t so different from a
                                                      manufacturer that jumps into a dozen different
                                                                                                                   as she admits now, she never took the time to
                                                                                                                   question or test them. But even if she had
panding client list—at least nothing beyond           product lines or a retailer that branches into               taken the time, she didn’t have the means.
the usual sorts of snafus experienced by fast-        several market niches in quick succession.                   Consequently, Post continued to believe that
growing companies. Customers loved Post               The question was never, What do we do best?                  sales would be Diamond’s salvation when, in
and her company. But in four years Diamond            but always, What else can we sell?                           fact, nearly every sale she made pushed the
Courier had grown in so many directions that              It wasn’t that diversification per se that               company a little further into the red and a
it was no longer the one business that Post           had brought Post’s business to the brink of                  little closer to failure.
had started; it was more like six. As she had         failure. Any of the businesses Diamond now                        “Most entrepreneurs have no idea
pursued the simple idea of running a down-            found itself in could conceivably have been                  what it really costs them to produce a
town bicycle-courier business Post had seen           profitable. The problem was that Post simply                 product or service,” asserts Al Sloman.
and gone after other opportunities. Now, be-          didn’t know which, if any, of them were. She                 He’s the veteran industry consultant rec-

                                                                                2
                                                                                                    Article 34. Are We Making Money Yet?


                                                            RESOURCES

       The information contained in the             BOOKS                                              EXECUTIVE ED
   resources below can help entrepreneurs
     think smarter about costing, pricing,          Accounting and Financial Fundamentals for          In a course in strategic planning offered by
         and business-unit profitability            Nonfinancial Executives, by Valarie Neiman         the respected Council of Smaller Enter-
                                                    and Eileen J. Glick (AMACOM, 800-262-              prises (COSE), 30 company owners con-
                                                    9699, 1996, $18.95), covers the basics of          vene on Saturday mornings to analyze
                                                    cost accounting, the contribution concept,         how they’re making money (or not). Stu-
  ARTICLES                                          and other management tools. Two recent             dents team up with past graduates of the
                                                    works demystify pricing and are well suited        course, who serve as their mentors. The
  A free three-page executive brief on activity-    to service companies: Priced to Sell, by Her-      price: $2,695. Courses, which are held in
  based costing, a useful tool for companies        man Holtz (Upstart Publishing, 800-829-            Cleveland, Dayton, and Louisville, start in
  whose overhead is growing as fast as their        7934, 1996, $27.95); and No Apologies Pric-        September and October. Call COSE at
  direct costs, is available from ABC Technol-      ing (Home Based Business Association of            216-621-3300 for more information. The
  ogies, in Beaverton, Oreg. (800-882-3141).        Arizona, 602-464-0778, 1995, $9.95), a 52-         1,400-page course book can be had for
  A 16-page manufacturing case study, “Why          page booklet worth its price because of its        $250; send a request to j.sussbauer@
  You Should Consider Activity-Based Cost-          wonderful simplicity.                              csuohio.edu by E-mail.
  ing,” can be obtained free from Small Busi-
  ness Forum (800-419-5018). To see how the         SOFTWARE                                           ON-LINE
  practice works in service companies, order a
  reprint of “Tracking Costs in a Service Orga-     Tracking costs is made easier with the “job        A primer on how to do a business-unit
  nization,” published by Management Ac-            costing” modules available with major              “contribution-margin analysis” is avail-
  counting (800-638-4427, extension 280) in         accounting-software packages. See “Ledger-         able on America Online (go to key word
  February 1993, which explains how Fire-           demain” in the June issue of Inc. Technol-         “Inc.”) under “Inc. Extra” and at Inc.’s
  man’s Fund uses activity-based accounting.        ogy.                                               Web site (http://www.inc.com).




ommended to Post by the friend who had             money and which are not. For Post the               their respective use of the company’s re-
examined her books and sounded the                 analysis proved to be eye-opening.                  sources. “If employees and managers could
alarm. When he was hired to help her,                  The key to building a profit-center state-      say how they used their time, we used that,”
Sloman made it his mission to get Post to          ment is knowing how to identify all the             says Sloman. “If not, we looked at the level
understand more than the operational               costs associated with a particular business         of activity, say, the number of jobs per
side of the courier business. She knew all         activity. Sloman helped Post extract sales          profit center” as the basis for allocating
about that. His goal was to teach her the          and cost data for each of the businesses Di-        overhead.
business side of the business—to get her           amond was in by poring over work records                As they proceeded through that exercise
to understand and acknowledge that in              and computer files. Line by line, they com-         over a period of weeks, the scales began to
addition to dollars in (sales), she also had       piled the labor costs, the operating costs,         fall from Post’s eyes, and the errors induced
to deal with dollars out (costs). If Post          and the administrative costs directly linked        by her earlier assumptions became painfully
was going to be the chief executive of             to each of the six business lines. They could       apparent. Nowhere had they been more mis-
Diamond Courier, not just its chief sales-         have stopped there, but the profit picture          leading than in Diamond’s original busi-
person, Sloman believed, she would                 would have been incomplete. Because                 ness—downtown bicycle-courier services.
need the management-accounting tools               Post’s back office had grown so rapidly and             For instance, Post had assumed that if
that would let her test her assumptions.           come to generate such a large portion of to-        competitors could make a living with
Over several months in the fall of 1994,           tal costs (sales, general, and administrative       prices lower than hers, then she had to be
Sloman helped Post learn to use several            costs made up about 30%), they also had to          making money, too. She had assumed that
of those tools. But just as important, he          allocate those indirect costs among the var-        the revenues generated by her bike-mes-
also gave her a clearer understanding of           ious businesses. How the overhead costs             senger business contributed handsomely to
what her job as owner and manager of a             were allocated was crucial, because the al-         total company revenues and profit, since
fast-growing company had to be.                    location rationale would, in part, determine        the bike customers were among her oldest
    Chief among the tools that Sloman              which businesses showed a profit and                and largest accounts. (Besides, to Post’s
showed Post how to use was profit-center           which did not. Sloman urged Post to use an          thinking, Diamond’s downtown image
analysis, which amounted to showing her            allocation system known as activity-based           was the colorfully shirted Diamond Cou-
how to build an income statement for every         costing. (See “Resources.”) Essentially, ac-        rier cyclist.) Because the back office was
business line Diamond was in. A profit-            tivity-based costing assigns overhead costs         always busy, Post assumed that her bike
center analysis can reveal which activi-           to the various businesses not in proportion         messengers were busy, too, which meant
ties—or, for that matter, which sales terri-       to their revenue shares (which is the con-          that they were working on commission,
tories or branch operations—are making             ventional technique) but in proportion to           not for the minimum hourly wage she

                                                                         3
ANNUAL EDITIONS

guaranteed them. And since the commis-                      Was there a way to jettison the bicycle-              doubles as a dispatcher, for example.) And
sion was roughly a 50-50 split, Post as-                courier business gently without losing the                now that she understands her cost of sales—
sumed that 50% was her gross margin.                    profitable driver jobs that came from the                 and her company’s sales cycle—she is pre-
    How wrong she found that she was. The               same customers? Post and Briscella ner-                   pared for cash crunches. In other words,
bicycle division, which she thought of as Di-           vously rehearsed what they’d say in face-                 Post no longer views her company through
amond’s core business, generated just 10%               to-face visits. A few customers wouldn’t                  the narrow prism of sales; she now has the
of total revenues and barely covered its own            stand for it, and Post wasn’t surprised                   broader view of a CEO.
direct-labor and insurance costs. (See “Bike            when 4 of her top 30 accounts took all their
Delivery: Profit and Loss.”) Worse, the divi-           business elsewhere. But she took her
sion created more logistical and customer-
service nightmares than any other single
                                                        lumps up front. “I wanted to be clear and
                                                        direct with my client base, and I think I
                                                                                                                  T    ODAY DIAMOND COURIER IS NOT
                                                                                                                  the greyhound start-up it once was. The of-
business, thereby generating a dispropor-               gained credibility that way,” she says. In                fice is a lot quieter now. The rock-and-roll
tionate share of overhead costs. Diamond                the end Post kept all the large accounts that             environment is gone; Diamond’s baby-
wasn’t making money on bicycle deliveries.              used her drivers more than her bikers.                    boomer managers have grown up. The
It was charging customers $4.69 per job, but                Hard as the decision to close the bicycle             company is healthier. There’s cash in the
with fully allocated costs of $9.24 per job,            operation had been for Post to make, it lib-              bank—which called recently to congratu-
the company was losing $4.55 every time a               erated her. No part of the business was un-               late Post on her progress.
cyclist picked up a package.                            touchable anymore, and no part of the
                                                                                                                      Post is healthier, too. She works out ev-
    Post’s assumptions about her bike cou-              business was unknowable.
                                                                                                                  ery day, and she’s laughing again. She
riers’ productivity had been completely                     Within a few months, Post closed two
                                                                                                                  hasn’t had to hock any stocks or jewelry in
wrong. Instead of the three deliveries an               more of Diamond’s unprofit centers—air-
                                                                                                                  a long while; she recently rented a nice
hour she assumed they made, the real fig-               freight and parts distribution. Using the
                                                                                                                  house for herself and her two sons. “I still
ure was less than half that. So, instead of             profit-center analysis, Sloman had pre-
                                                                                                                  don’t balance my own checkbook, but I
the 50% gross margins she assumed she                   pared a pro forma income statement that
                                                                                                                  know now if my company is making
collected on each $4.69 bike job, the real              showed Post she could actually increase
                                                                                                                  money,” she says. “Boy, do I know.”
margin worked out to only 10%—not even                  profits by reducing sales. He showed her
enough to cover her overhead, never mind                that by cutting $521,000 in unprofitable                      Thanks to a strong fall—a good chunk
providing a profit.                                     sales, she could eliminate $640,000 in                    of the $400,000 in lost revenues was made
    Sloman showed Post how to perform                   costs. Sloman wanted Diamond to elimi-                    up with more profitable business—Dia-
the same kind of analysis on Diamond’s                  nate all services and customers that didn’t               mond managed to finish 1995 in the black,
other operations. She was shocked to see                generate a profit, but Post couldn’t do that              and the profits continued to accrue through
that four of the six—all except driver and              and didn’t think she should.                              last winter’s snowstorms. Overall, revenue
truck deliveries—were generating losses.                    She decided, for instance, that some                  per job has more than doubled, from an av-
    One Monday morning two months after                 services she couldn’t afford to operate her-              erage of $13 in 1993 to about $28 in 1995.
Sloman’s arrival, Post made an announce-                self, such as airfreight, were worth broker-              Post and her managers think about sales
ment. “I’ve made up my mind,” she said to               ing on occasion in order to retain clients                differently, too. They’re as likely to argue
Sloman and her managers. “I know what I                 that generated profits for her elsewhere.                 about which customers to drop as which
have to do.”                                            And she replaced a few of the bikers with                 prospects to pursue.
                                                        walkers, who now service select customers                     Now Post counts her blessings, along
                                                        at a premium price. Still, in 1995 she for-               with her cash, every night. “I mean, I could
O     N JANUARY 3, 1995, POST SHUT down
the bicycle-messenger business, which was
                                                        feited sales of about $400,000—most of
                                                        them willfully.
                                                                                                                  have just spun out,” she says. She knows so
                                                                                                                  much more now. “I know what I need to
killing the rest of the company. She saw                    Post also raised prices for some of the               break even every day,” she says. “I monitor
plainly that it was pointless to compete with           work Diamond did. Now that she knew how                   my payables. I know what my cash flow is
operators charging $3 per delivery when she             to wield a calculator and could compute her               and what’s going into the bank every day.
had to charge $10 just to cover her costs.              average cost per job, she realized that she’d             We created a budget, and I understand what
(After all, the $3 operators were smaller               priced too many jobs at or below breakeven.               it means to live budget-to-actual.” A soft-
companies focused on bikes.) And it made                    Perhaps the biggest change for Post her-              ware program provides her with a daily re-
no sense to try to run the bike work simulta-           self was that for an entire year, she stopped             port of revenue per job. “Look, I’m never
neously with the suburban and regional ve-              selling. Instead, she threw herself into the              going to be a serious financial person,” she
hicle work, which was profitable, each job              task at hand—visiting dozens of customers                 concedes, “but you own a business, it’s your
generating an average of $27.60 in revenues             and writing to hundreds more affected by                  responsibility. I can’t slough it off on some-
to cover $21.23 in costs. “We didn’t need               the changes she was making. And when that                 body else. I have to know.”
the bike service to have the vehicle service,”          was done, she realized how much more
says Post. “I knew I couldn’t delay the deci-           work she still had to do—work that contin-
sion, because every second was costing us               ues. She hasn’t stopped looking for ways to               Article’s editor, Susan Greco, can be
money.”                                                 trim overhead. (Her operations manager                    reached at susan.greco@inc.com



          Reprinted with permission from Inc. magazine, July 1996, pp. 52-54, 56, 58, 61. © 1996 by the Goldhirsh Group Inc., 38 Commercial Wharf, Boston,
          MA 02110.




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