By Steve Ryan
Like many independent business owners, you may view financial management as a distraction from the day-to-day running of your business. Abstract concepts that must wait until there is time and opportunity to get beyond the pressing needs of today. If you think that, take a look at what distinguishes successful contractors from those who are barely surviving. Among the critical differences will be a working knowledge of finance. From that perspective you see that an ability to understand your numbers and use them to make better decisions is no luxury. It is a key to success.
Accounting and finance might seem to be all about looking backwards at what you have already done. Actually they have more to do with looking ahead. When we understand how money moves through a business we learn to recognize the patterns and indicators for how things might behave in the future. We make better decisions, anticipate difficulties and in the end spend less time on crisis management.
Now let’s deal with another misconception. You may think that management finance means diving into ledgers and spread sheets, distracting you from the real work happening on the job site. The real objective though, is to minimize the time you spend on facts and figures. When you learn to focus on the numbers that really matter, the rest of them become less confusing. Understand what they tell you about your business and you can make better decisions in a lot less time. It takes some effort to learn what those financial guideposts are, but once you do you become a more efficient manager.
You may be thinking there has to be a catch here somewhere or we’d all be doing it, right. Yes there is a catch. It just isn’t very obvious how these financial “guideposts” relate to the real world. Why do they matter, and how do a few isolated numbers say all that much about your company. It is a leap of faith. If you put in the effort, can you be sure to see the benefits promised so confidently by those of us in our “ivory tower”.
When we start to work with a contractor, one exercise we conduct is a series of questions. Most people don’t have the answers, but that isn’t really the point in asking. What we want to know is whether the client can wrap their head around why the question matters. As with most problems (or opportunities), half the battle is appreciating what the questions are. It’s a sort of general management aptitude test.
If you think it’s time to take your financial management up a notch, try some of these questions for yourself. We can’t cover all them all in one short article, so start with the following and, in part two, we’ll tackle the rest.
HOW MANY PROJECTS DO YOU DO IN A YEAR? (actual number, not estimated)
We ask for the actual number, because if you aren’t counting you should be. The number of jobs you do can dictate the resource requirements of your company just as much as the size of each job.
HOW MANY PROJECTS COULD YOU DO WITHOUT ADDING PEOPLE, EQUIPMENT OR PROPERTY?
You need to know your capacity in order to respond to opportunities. Odds are if you want to take on new business you will need to beef up some element of the operation. When you know where your constraints are, you can assess opportunities better and prepare for action more effectively.
HOW MANY PROJECTS WOULD YOU WANT TO DO? (What size do you want to be?)
You’ve heard Einstein’s definition of insanity: “doing the same thing repeatedly and expecting something different to happen”. He was being an optimist. In this industry, if you keep on doing the same thing something different will happen. The world will change around you and you will be left behind. Set a target. Yes the future is unpredictable, but you will still get closer to a moving target when you take aim than you will by leaving it up to circumstance.
WHAT IS THE AVERAGE SIZE OF A PROJECT? (in dollars, actual number not estimated)
Sure your jobs can range from very small to immense, but most organizations have a sweet spot. Your crews, equipment, office support, project management, all have a scale at which they are most efficient. You probably already have a sense of your “typical” or “ideal’ job size. Now compare that to the size of job you are actually doing. Either adapt your operation to the work you are doing, or target your sales effort toward the type of work you are best equipped to perform.
Next month we’ll examine questions related to margins and cash flow.
Steve Ryan is a managing partner at MMI Professional Services.