As a restoration business coach I spend a lot of time teaching contractors how to control material and labor costs. I oftentimes speak about the importance of job costing in order to assess operational efficiency and verify bottom line per job profits. I teach contractors how to get paid fast at the start of the and at the completion of each job. Each time I speak about ways to take control of spending and make more money for the contractor I always underscore the importance of the Purchase Order as a basic element to any cash flow management system.
I am surprised by contractors who feel some of the most basic systems of management are just too much trouble to use. Some contractors just haven’t connected the dots and fail to see the business benefits of such an important system. This is true of Purchase Orders – though they are an absolute MUST for any serious minded profit protector! While the PO system is only a single component of a larger multifaceted management system it is a vital means to squashing overspending and sustaining solid cash flow.
A good PO System begins with taking all credit cards away from your employees. Yes, that’s right – ALL field and production personnel including managers need to give them up and turn them in! Yes, take back every one of them right now. Without a credit card in their pocket purchasing must involve the main office where credit card information is kept in trust and under lock and key. This is the first meaningful step toward controlling spending.
Many times owners unknowingly forfeit financial and operational control and accountability for the sake of employee convenience. If you don’t mind losing a ton of money month after month continue making employee convenience your top concern. How familiar does this scenario sound– the employee heads to the store for the third time today. He grabs a few things needed for the job site. He checks out with his company credit card and heads for the truck. He tosses the receipt on the dashboard along with a half dozen receipts from prior purchases, and off he goes back to the job site but not before a quick swing through McDonald's for a large Diet Coke.
This is an all too familiar routine of construction workers and this leads to all sorts of problems for management. Too many trips, too many purchases, too little accountability, too little time being spent at the job sites, and too little recordkeeping leads to too much wasted time and consistently lower profits. The PO System is designed to put a halt to this waste.
Picture this scenario – just prior to checking out at the Home Depot Pro Desk (who can open an account for your business requiring a PO number for every purchase) the worker calls the office to make certain the purchase order coordinator is available at check out. The coordinator takes a brief moment to ask the employee what they are buying, for what job, and why are they there for the second time today – “stop that”, they are told, “you get one material run per day.” The buyer is also asked if they have their material list for their scope of repair. If the answer is "no," the office refuses to pay for the materials.
WHY? How can the buyer know what to buy, how many, and at what cost without their material list? The two hang up. The worker calls back at checkout and the clerk takes the credit card information and the purchase order number over the phone, and is asked by the coordinator to fax the receipt to the office which they are happy to do. The receipt goes into a special email bin so that it can be properly job costed and uploaded to the CRM program, and into the customer file for which the materials were purchased. The coordinator enters the information on the PO sheet and the transaction is complete.
Which scenario serves your business interests best ... employee convenience or control and accountability? Only the latter will protect the interests of your business. This simple process insures accountability for your employees and puts a halt to the freewheeling common for many construction workers who have little to no supervision and accountability. It provides a no doubt about it means for consistent job costing which is vital to monitoring your per job gross profits, and it provides a means to stop employee waste and fraud.
Here is the kicker to your program - reconcile credit card statements at the end of the billing period with the PO Registers. Since the POs and the statement purchases are in calendar order doing so is not difficult or time-consuming. If the charge is not found on the primary register look for it on the secondary register used by your backup PO Coordinator. If it's not recorded on either register, there is a problem since you have found an unauthorized purchase that has not been approved or job costed.
The statement provides information for where the purchase was made enabling the PO coordinator to track down the actual receipt from the vendor and get it properly recorded and job costed. This same process should be completed for vendor statements. For example, if you have an account with Home Depot or Sherwin Williams and receive a statement of activity each month a review of all purchases against the PO register can quickly and easily be completed. You are simply looking for any purchase that was not authorized by a PO.
If you find an omission contact the retailer and find out who made the purchase. Coach, train and redirect the purchaser to eliminate problems in the future. Record the purchase on your PO register, and job cost the purchase to the appropriate job. What does this do for you? It insures every purchase is accounted for. Perhaps you will find the unrecorded purchase included excess spending or material overages, or an unauthorized purchase of tools, or employee fraud.
Always get to the bottom of things and take appropriate action. Maintain control over your purchasing! Contractors lose more money from loose controls on material purchasing than any other single failure in business. You can close the back door to overspending right now. The PO System isn’t the only step in a good cash flow management process, but it is central to your efforts to control spending and squash overspending. Reference: 3 Month Coaching Plan – The Cash Flow Accelerator – Blow the Lid of Your Cash Flow Chaos