Archive for June, 2010

Setpoint’s Project Management Method Part 1

June 30, 2010 by Kara

How do you manage projects?  The Setpoint way of project management is different from that of most companies.  We are a project based company and the standard accounting methods of tracking projects does not work for us.  We have seen many competitors go out of business, not because they don’t have good engineers and can make the machines work, but because they are not able to do it profitably.  In the first of five video clips, Joe Knight our CFO will talk about how Setpoint manages projects and what makes our way different from other methods.

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Revenue Recognition in Managing Projects

June 22, 2010 by Joe Knight

One of the issues that the founders of Setpoint, Joe Cornwell and Joe VanDenBerghe realized early on was that they did not like the way the accountants did project based accounting. At the crux of the problem was the cost versus budget approach to revenue recognition. Under GAAP (Generally Accepted Accounting Principles) the rule for project revenue recognition was percent of cost complete. For example, if one spent $1,000,000 on a project and the total project cost budget/estimate to complete was $5,000,000 then the project would be considered 20% complete for revenue recognition purposes. So to complete this example if the project revenue was $7,000,000 then 20% of revenue would be $1,400,000. So the period profit and loss statement for that project would look as follows:

Revenue    $1,400,000
Expenses   $1,000,000
Profit         $  400,000

The Joes questioned the validity of that profit. They debated with their accountant. They struggled with the concept. Their issue was with the way their automation equipment business operated. A large machine can take 6-9 months to complete. A lot of the work is at the end of the project when the machine is starting up and being debugged. The problem with the GAAP accounting method is that the profit is recognized before the real tough work is completed. As an example say Setpoint builds a $3,000,000 machine that will take about 9 months to complete. In the first 3 months the machine’s materials are received and design is complete. Let’s say that material costs on the machine are $1,500,000 and the design cost another $100,000 in labor. So by the GAAP accounting method the machine is $1,600,000/$3,000,000 or 53% complete. Therefore, 53% of the projected profit can be recognized in the first 3 months. One the other hand, a small fraction of the total labor to complete the job has been incurred at that point.

Let’s assume that Setpoint estimates that the total labor costs will be $1,000,000. So by labor measures Setpoint has spent 10% of its labor budget or $100,000/$1,000,000. Yet the accountant will say that the machine is 53% complete. This discrepancy can create a false sense of safety early on in a project when little work is done. Furthermore, if there was large labor overruns later in the project during the startup/debug process those past profits could be overstated.

Because of this issue Setpoint decided to measure revenue in a different way. At Setpoint, we measure percent complete by labor only. We evaluate how much labor was spent on a project every week and then we estimate labor required to complete the work and use labor only to recognize percent complete for revenue recognition.

Setpoint uses two methods for estimating labor. First, for smaller projects we look at labor by discipline and estimate how much will be needed to complete the project relative to what has been spent. For our larger projects we look at these numbers based on schedule based earned value tools. We update these projects on a weekly basis so our project engineers can stay close to the performance of our projects and to make it possible to communicate our profitability to the entire company on a weekly basis. We will talk more on project tracking and earned value in a later blog.

We also have a white paper that talks more about our project management techniques, feel free to download it.

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Anticipating Cash Flow on a Large Contract

June 17, 2010 by Machel

Does your company play offense or defense, when managing cash?  Cash flow management is always best when played offensively, rather than defensively.  If there is a project on the horizon that is larger than normal and will stretch a credit line, calling vendors ahead of time to request credit limit increases or terms extensions is vital.

Over the last eighteen years, Setpoint has developed a great working relationship with their vendors.  This has paid off more than once.  Because we pay our bills consistently on time and/or take discounts, we have been told by most of our vendors that we are one of their preferred customers. If you have not been paying your bills on time, or you consistently drag them out – quit reading right now, you won’t have a chance. Occasionally when we have needed a little flexibility in our payment terms they take our calls and work hard to get us the help we need.  When we go to the vendors with a request, without a doubt every one of them have said “Yes”.  Sometimes vendors can’t provide the terms we requested, but they come back with something that we both can work with to help us during our crunch time. This can only be done if you are playing offense and know well in advance that you need the help. Calling when you are already 60 days overdue on your bills will not get you very far in negotiations.

These calls can be a difficult thing to make.  Here is where the old adage applies, “if you don’t ask, you don’t get”.  There are a few questions that need to be asked before calling on the aid of the vendors.  For instance:

  • Do we pay our bills on-time?
  • Do we award PO’s to the lowest bid?  Or do we use a variety of matrices for awarding PO’s?
  • Do we have someone who can communicate well with our vendor’s credit department?
  • Can we articulate the reasons for the extension?
  • Are we willing to pay a finance charge to vendors, if needed?
  • Do we ask the same thing from all vendors?

If you can answer positively to these bullets, you are prepared to go to the next step.  Some other questions you should consider are:

  • Is it a temporary or permanent change?
  • How often do we ask them for changes in terms?
  • Can we afford to order from vendors who can’t or won’t extend terms?

Who do you call?  No, not Ghostbusters.  Who makes the calls?  It is good to have both the purchasing and the finance department make the calls.  Purchasing can start the dialogue with the sales department, while the finance department can contact the vendor credit department.  Generally, the credit department will request information from their sales force to check on the customer’s stability and contract viability.

Any coach will tell you that their offensive team is the most important part of the team.  In business this means that understanding your cash flow needs well in advance – will keep you out of trouble. Ask yourself this, are you ready to play offense?

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Continually Implementing the 5 S System

June 3, 2010 by Kara

After working for Setpoint for almost 4 years now I have come to expect the continual 5 S clean up around the office and the shop floor.  This year I was tasked with cleaning up our internal Company Intranet site and no sooner had I started that when I was tasked with going through the 5 S’s of sort, straighten, shine, standardize and sustain of our website.  After we found so much unneeded stuff on our Intranet we wanted to make sure our website wasn’t filled with a bunch of old or outdated information.

Sorting though and looking at what you have on a website seems to take a while because not only are you cataloging what is there, you’re making decisions on its importance.  Working at a custom automation company there have been many projects that we have done over the years, and from a marketing standpoint I wanted to emphasize all the capabilities that we possess.  However, from a company standpoint I had to consider which capability was a critical core competence that we wanted our potential customers to understand vs. a capability that is more of a commodity that most automation companies possess.

Straightening up the site required that I carefully go though the website and make sure everything had a consistent look, feel, and were in the same places.  For instance the lead generation form was important.  I know that I don’t like it when I go to websites and struggle to find the lead generation form or even to find my way back to where I came from so in straightening the information I have tried to make sure everything is set up the same.  I also felt that it makes it easier to go to various web pages if there is some similarity in where to go to find certain things.  For instance, under the about section there better be information about the company like their history, management, and press releases.  That’s what I have come to expect on other sites so I made sure it was the same for mine.

Shine is a little different on a website since you don’t have floors to sweep and polish, but it is no less important.  In shining the site I looked at the feeling or look of each page.  Does it have a clean look to it?  Is it really crowded or is it empty?  Shining for the website became the overall look and feel.  It’s hard to find your way around a site that is crowded and has a lot of extra stuff shoved into every corner.

Standardize came easily after sorting and straightening.  Once the importance of items had been established, the standardization of placing the content onto the website in a consistent way leads to a standard look and feel on each page.  Because each item had been sorted and straightened and the website “shined” the standardization fell easily into place.

Now comes the time of sustaining the changes made as well as sustaining the standardized process of placing new items onto the website.  It would be all too easy to just say whew we made it through that, but that’s not what the Toyota Production System (TPS) is all about.  TPS is all about continual change, making changes all the time to add value, continue to learn, grow and get better at what you’re doing.  That’s why continually running through the 5 S’s of sort, straighten, shine, standardize & sustain is so important.  Each time you go through the steps there will be new items to look at and work on.

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