NSCA’s Financial Leadership Council offers recommendations to position your integration company for financial success this year
Financial leadership should always be top of mind for integrators, but the current market and uncertain economy make it even more critical for financial success in 2023.
Great financial leadership starts with having the right advisors in the right places. From there, they must be empowered to make changes that protect your integration firm from vulnerabilities while also supporting profitability.
Last year, NSCA’s Financial Leadership Council (FLC) conducted a small, focused survey of CFOs within the commercial integration industry. The goal was to shed light on budgeting challenges and concerns heading into 2023.
As a result of what that survey revealed, here are five recommendations from the FLC to position your integration company for financial success in 2023.
1. Consider and Plan for Changes in Cost Structure
The survey asked how cost structure (total payroll plus general and administrative expenses relative to revenue) has changed over the past few years.
For 80% of respondents, cost structure has increased—payroll, rent, vehicles, marketing, IT, etc.). The remaining 20% of respondents indicate that cost structures stayed the same.
Given these findings, at least four out of five integration companies will need more revenue in 2023 to break even. Understanding this metric is important: What are your plans to increase revenue in 2023?
2. Take Steps to Mitigate Supply Chain Risk
The survey also asked CFOs about the impact of the supply chain. It’s no surprise that the results show an overwhelming impact.
Although there are no snap-your-fingers resolutions to address global supply chain challenges, NSCA is doing what it can to provide valuable guidance amid the turmoil.
Our recent Supply Chain Risk Mitigation Strategies for Integrators guide offers valuable advice, such as:
- Using force majeure language to project integrators when the project becomes impossible to complete
- Creating proposals that are only valid for 30 days
- Passing costs to customers when it comes to freight and vendor price increases
- Performing a true risk assessment prior to signing a contract
- Adding a “Backlog Gross Profit % Column” to your work-in-progress report
3. Identify Sources of Gross Profit Erosion
Our CFO survey also asked financial leaders to evaluate gross profit erosion and identify the biggest impact.
Nearly 65% pinpoint lack of equipment to finish projects—which points back to supply chain issues. About 25% identified the source of erosion as supplier price increases after a project is sold; a small percentage blame labor shortages and wage increases.
Gross profit should be north of 30%, but lack of equipment to finish projects is crushing many integrators. It’s often the one missing part that makes it difficult to recognize revenue on projects. Most integrators don’t have built-in profitability to withstand a 7.5% miss on profits.
Pay close attention to where gross profit erosion comes from. If you don’t understand the root of the problem, then it will be impossible to address.
4. Take Stock of Backlog Trends
Backlog is a volatile topic. In the depths of the pandemic, there was so much uncertainty about when customers would start spending money again. NSCA members were overwhelmingly concerned with keeping people employed—a daunting objective given many dried-up project pipelines.
But things changed. Return-to-work strategies led to great demand for integration services. Backlogs filled up again. Although that’s great news, it’s also coupled with supply chain challenges that prevent projects from being completed. Frustration among integrators is off the charts—and with good reason.
In the CFO survey, we asked integrators how they expect their backlogs to change in the next year. The results show that 85% expect their backlogs to remain larger than normal as supply chain issues continue, while 15% expect their backlogs to return to normal and to be able to fulfill projects.
Integrators should strive for approximately 50% of annual revenue in backlog. Given the industry’s current challenges, many are likely far from that goal.
Examine your best year in business—and your backlog at that point. Create a goal to hit that target again. Take note of whether the backlog will produce high gross profit or jobs that aren’t likely to break even.
5. Reconsider Your 2023 Forecast
It’s not too late to reexamine 2023 budgets. There are many variables in creating an accurate budget for 2023—including inflation. If you’re a $10 million company this year, consider the impact that 1.2% year-over-year inflation will have. Some NSCA members are reporting 10%+ increases.
Think about baking inflation into your budget for 2023. A $10 million company may have to be an $11 million company to cover inflation this year. But remember … that isn’t real growth. Instead, it’s growth adjusted for inflation.
Forecasting for 2023 was more difficult than in years’ past. Inflation-driven fuel charges, wage increases, material costs, and more complicate forecasting. To achieve financial success in 2023, our best advice is to focus on what you can control.
De-risk your proposals with terms and conditions that are favorable to you. Quote what you have or can get—or have documented delivery and guaranteed price protection. Set parameters and eliminate projects that are below your minimum anticipated gross profit threshold. Don’t undervalue the work your company does.