Introduction
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An unlimited supply of money
How I wish I could buy whatever I wanted, needed, desired whenever and without a care. Money is a resource and history has taught us that resources are always scarce. You would think we would all be in lock step when it comes to something as important as money and finance, since we all deal with it every day. That is clearly not the case. Engineers, managers, business owners and consumers all think about money in different ways. The wise use of money can make or break a business, so I thought it is be a good topic to discuss.
Perspectives
As an engineer, I have certain wants; things I need to have in order to get my job done. In the past I, or my co-workers, have asked for equipment. We might have insisted or demanded that we must have it. The reasons can range from, “We need to get our job done,” “We don’t have the capability we need without it,” “The available tools are junk.” Rarely do we admit that it is the coolest thing and even though we really don’t need it we want it very badly. Needs verses wants are not high on an engineer’s decision-making list. After all the company makes barrels of money.
This can be seen as consumerism. If I have a smart phone and a new one comes out, do I really need it? Will it let me do something I can’t do now? Will it really make me more efficient? We rarely distinguish between needing something and wanting something. For example, I might need an oscilloscope but I probably don’t need that $10,000 oscilloscope.
Managers have needs and wants as well. They usually have a budget to maintain. They need to get projects done to support new products or manufacturing. They do not have an unlimited supply of money and so must decide what things to fund and what things to delay funding on or not to fund at all. It is easy to see, from their perspective, why a communal o-scope sounds like a good idea. The EE in her office probably would rather have one sitting on the desk than having to hunt one down each time she needs it.
Business owners are similar to managers, but they are looking at the problem from a slightly larger perspective. The owner or president doesn’t just have a budget, he or she has to balance paying all the bills (including salaries), buying capital equipment, planning for new products, and keeping up on maintenance with the available funds. A worker becomes complacent because their money comes in regularly every pay period. The business owner has to deal with a lot more variability in cash flow.
Stories
For me, the easiest way to wrap my head around a new concept is using stories. After all, our Celtic ancestors have been telling stories since the beginning of time.
I can’t afford that!
One of my customers had a market value of $1.8B last year. That is billion with a big B. It is no surprise that I like to use Altium to make schematics and do PCB layout. My customer does not use Altium. They either do layouts using a mechanical CAD program or a hobbyist version of design software. They said they couldn’t afford to buy a seat of Altium. Now my market value is going to be a lot less than $1.8B this year, but in February I bought a seat of Altium. It was a lot of money but well worth the investment. How is it that I can afford this but they cannot?
While getting ready for this newsletter, I talked to them about their decision. Their response was that they don’t make many PCB’s, even though they sell lots of them. While $9K is not a lot of money compared to their bottom line, the time required to recover that investment was large because they really did not plan to use it very often. Knowing this makes a difference in how I view their decision. It makes more economic sense to outsource that work then to do it in-house. The simple fact is that they will make more money by investing the available funds elsewhere – good choice.
Buying that new solder iron
As a small business you are often faced with making due with what you have. I have some rather old soldering irons that were very nice in their day. I bought them second hand from Ra-Elco. They are not hobby level devices but they are not the biggest and best nor the latest pieces of equipment. They work well and have made many a PCB. Our new technician complained that they were not getting the job done and suggested that we consider upgrading.
Upgrading to a similar setup, but you know stuff made in this melena, would cost $400-$500. Upgrading to a premium station would be $900-$1,200. Not an astronomical amount, but it got me to thinking about how we spend money. Money is and always will be a scare commodity. Making good choices is paramount. I am all for spending money if it will bring money in. If the equipment does not work we replace it, if it does we use it. If it is inadequate, we must evaluate the cost of using the current equipment verses purchasing new equipment that expands our capabilities.
We probably make a few dozen prototype boards a year. If the customer wants more than about 5 modest size boards it makes sense to spend the extra money and have the boards machine placed. For small quantities it is more economical to place the parts by hand.
In the end we determined that the problems he experienced were probably due to surface contamination on the parts we were trying to solder onto the board. For now, spending additional money on new equipment will not expand our capabilities and so we are not going to buy new soldering irons.
Stepping over dollar to pick up dimes
Another company that I know has a key piece of equipment that breaks down once or twice a year. The majority of their revenue is touched by this machine in some way. The equipment runs a version of DOS, to help you understand its vintage. When the device goes down it takes over a week to get in replacement parts, during which time everyone working on the line has to stop. They still get paid, but they are not making product. Their back log, over the last 6 years, averages in the tens of weeks. A new machine would cost several hundred thousand dollars. This is clearly not a trivial decision.
From my perspective they were stepping over dollars to pick up dimes. You spend the money on what you need to get the job done. Sometimes, by being cheap you actually spend more money than if you had bought the tool you needed. Other times, you give up revenue because you don’t have the tools to get the project done; lost opportunity cost. I think they could be more efficient, make more money, and serve their customers better by upgrading the equipment and looking to expand the use of the equipment by bringing in additional projects.
Balance
Spending money is all about balance. You must decide how you will spend money to maximize your income, that is what a company does. It sounds simple but it is not. It might make sense economically to use old equipment, but it may frustrate the human resources you have, to the point that they go searching for greener pastures. Knowing when to spend money and when to make do with what you have is critical to the success of a company. The Small Business Association says that 66% of all business fail in the first 10 years. This is true whether the company is large or small. Steve Jobs was re-hired to come back to Apple and save it from Bankruptcy in the late 90’s. I hope we all learn to spend money wisely.
Final thoughts
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