I will be to be speaking at an A&E industry focused networking event in Boston sponsored by Axium. This is a great opportunity to meet other firms in the area as well as hear me speak on a panel of industry experts discussing how firms can align themselves to finish 2013 strong and position themselves for a great 2014. You can use this link to register: http://info.axium.com/LiveBoston-Register.html. Hope to see you there.
While cash and profits are closely related, one is not always a reflection of the other. Developing an understanding of how cash and profit relates to building a healthy business is often a painful learning experience for entrepreneurs.
One of the first questions new companies DO NOT ASK is what do we need for financial management and accounting reports to manage my business profitably and put proper internal controls in place. (Internal controls are the basis steps and procedures that a company uses to reduce error and mistakes as well as to prevent fraud or theft from going undetected.).
All too often start-up companies go with a “quick” solution because it appears to be easy and inexpensive.
At this early starting point, investing a few hours to consult with a part-time CFO, who has business operations experience, can pay big dividends later. The PT-CFO can help you select the accounting software that best fits the early stage as well near terms needs of your company. Even if you opt for a quick solution, getting the accounts and reports set-up correctly at the start will give you the management data you need on day one and save hours of work later making changes that could have been avoided with an hour or two of conversation with a CFO resource.
Below are basic goals, objectives and types of reports you should be thinking about for your business.
- Financial reports should be issued on a regular schedule
- Cash should be recorded and reported every day.
- Today the majority of companies should have the month closed by the 10th to the 15th of the next month at the latest.
- Make getting sales invoices/billing out as fast as possible should be part of the company culture. Depending on the business daily/weekly/monthly.
- Use simple financial closing practices that reduce the need for big end of quarter/end of year adjustments.
- Data is out of date before you see it. Set up your procedures to insure that data is accurate the first time.
- All transactions should be recorded within the business day or first thing the next day for late end of day items.
- Budgets and Estimates need to be updated periodically and be available real time.
- Waiting for month end or the end of a project to end to learn if you made a profit is bad risk management.
- You need to have these reports, understand what they mean and know where data comes from:
- How much cash did I payout last month?
- How much cash did I collect last month?
- How much cash do I need to cover expenses for the next 13 weeks?
- Who are my most profitable customers/clients?
- What are my most profitable products or services?
- Who are your most profitable employees? (critical for service companies)
- How does my business development forecast compare to my budget plan and actual financial results?
- Top line Revenue Growth with no bottom line improvement is a common problem with young companies
- Sales are increasing, but the bottom line is not.
- Delays in completing reports and inaccuracies make it difficult to understand the relationship between Sales and Net Income.
- Real time data is needed to take action in a timely manner.
With a bit of planning setting up your systems and procedures to supporting your company’s growth puts you in the driver’s seat with the information you need and avoids headaches later, when is more time consuming and costly to make changes.
Professional service firms are seeing new business pick up.
This is good news. However, coming out of several lean years, many companies may find their internal infrastructure is not as strong or tight as it was 5 to 10 years ago. During this time period accounting and financial systems have had dramatic and dynamic upgrades.
Research by Service Performance Insight suggests that many PSFs have business and information systems that are outdated and stretched thin. Streamlining business operations and providing up to date financial systems is a top priority to support firm growth.
Signs that your financial system needs a review:
- Monthly financial reports are late & inaccurate.
- Getting billing out & closing the books is a painstaking process that never seems to end.
- The quarter is over and the first month’s reports have just been issued.
- People forget key tasks and make errors.
- Data is out of date before you see it.
- Service delivery demands real time data.
- Budgets, Actual and Estimates need to be updated real time.
- Waiting for the project to end to learn what happened is bad risk management
- The old centralized entry of time sheets and expense reports is out.
- You don’t understand what these reports mean or what data to look at.
- Do you know who your most profitable clients are?
- Do you know who your most profitable employees are?
- Is your business development forecasting integrated with your budgeting system
- Top line Revenue Growth but no bottom line improvement
- Client billings are increasing, but the bottom line is not.
- Delays in completing reports and inaccuracies make it difficult to understand the relationship between Net Fees and Net Income.
- Real time data is needed to take action in a timely manner.
- Consultants are used while internal staff is underutilized.
Are your systems and procedures capable of supporting your firm’s growth plans?
The WinterView Group “100,000 Mile Service for Business Operations” can help you answer, YES!
Professional Liability Insurance company data indicates there is strong evidence that keeping projects on budget and on time and reduces client claims.
Budget & scheduling problems trigger 12% to 14% of Architecture & MEP claims.
Total claim costs include deductibles and claim settlements as well as management time dealing with claims related issues. Hours managing claims has increased by 200% in the last several years.
Every dollar of claim costs requires $10 of revenue to replace the lost profit.
Steps to improve your risk management for your firm:
- Build your project plans by phase and task
- Give each phase a Fee and a Cost Budget
- Update the percentage of completion (actual work completed) by task at least weekly
- Update the cost to complete continuously
- Calculate Earned Value Analysis(EVA) on all project with a schedule of two weeks or longer
What is Earned Value Analysis (EVA)?
EV Analysis can help identify projects that are falling behind schedule with the potential to overrun budgets, even though the planned vs. actual expenditures comparison looks like the project is tracking well.
In the traditional analysis comparing actual dollar spending versus budget, many projects appear to be performing well until they reach the last 10% to 15% of the project life. Often it is too late to take corrective action to get the project budget and the schedule back on track to prevent a negative event.
EVA compares how much of the work is actually complete vs. how much money has been spent to date against the project budget and work plan. When displayed as a graph, there are three lines: Plan, Actual and Earned Value.
The state of the art Project & Accounting systems available today have an EVA tool built in.
Does yours? If not, WinterView Group can help you explore your options.
- How many staff hours were un-billable?
- Is your month to date revenue on target with your projections?
- The partners meeting is in an hour, but none of the staff have not entered their time for last week. The information presented will be inaccurate and incomplete.
Sound familiar? Studies have shown that firms that do not have a culture of daily time posting have billable leakage that can be close to 10% of revenue.
- Win It
- Deliver It
- Bill It
- Collect It
Partners & Principals in Profitable Professional Service and Consulting firms know these rules and metrics:
- 2080 Baseline
- 3x+ multiple
- Utilization rate
- Realization rate
Every month these firms update the answers to the following questions:
- What is the revenue generating capacity of our current team?
- How do we know when we can add staff and maintain profit margin goals?
- How do we know when we should reduce staff to avoid losses?