These three financial metrics are even more important for integrators than revenue.
Brad Dempsey, CEO at business software provider Solutions360, recently joined Brad Malone, managing partner at Navigate Management Consulting, on the Navigator video podcast to discuss project-based financial concepts for integrators.
Working with hundreds of integrators, “we see the complete gamut of maturity,” says Dempsey. “It really runs from lifestyle businesses — small businesses started by somebody who had a passion or a skill — all the way up to professionally run companies and others that are ISO certified. If I had to pick out one key indicator that I see in a mature integrator crossing that chasm, it’s embracing project management as a profession and having a lot more structure and process behind project management.”
A lot of very talented people have started integration firms, but many of them haven’t had much financial exposure. “This has created a lack of financial acumen in the industry,” says Malone.
During the video podcast, the two discuss the fact that too many integrators view revenue as a primary metric when it’s really just a number and potential for profit. “Revenue is for vanity,” says Dempsey. “I would go as far as saying that you have to run your business on gross profit, and you should measure your business on gross profits.”
Here are the more important, project-based financial metrics that Solutions360 recommends you measure instead …
1. Gross Margin Erosion
One of the things a company must do is determine a target gross margin that covers overhead. It’s very important to keep tabs on this number, beginning from when you create a proposal and moving on to negotiating a deal and managing that margin throughout the lifecycle of a project. Track costs daily. If you have visibility into daily costs, you’ll be able to react in a timely manner to overruns as they occur. Keep tabs on your current margin compared to what you sold it as. Doing this at the lowest level of time and material tracking will roll up to the project portfolio level where you have visibility to outliers that need your attention.
2. Gross Profit Dollars Per Hour
One of the most limiting factors for a company is direct labor force. It’s expensive to hire people. It’s expensive to keep people. It’s very expensive to keep them up to date, trained, and working effectively. If you have 1,000 hours of labor available, look at the backlog of projects and the deals coming in that require labor; divide the gross profit by the number of hours to calculate your profitability with a mix of equipment and services. That’s the overall solution you’re selling to the customer. The higher you can get your gross profit per hour, the more money the company can make without unnecessarily investing in unutilized labor and related expense.
Backlog is the difference between what you’ve actually sold and are financially committed to (a purchase order or legally binding deal with a customer) vs. what you’ve actually delivered or executed.
“Backlog has inputs and outputs,” says Dempsey. “The inputs are sales orders and existing projects; the output is your execution. The way these three things move together is critical in managing a portfolio of projects. If my backlog increases, that may or may not be a good thing. It may be that I’m doing a poor job of execution. It may be an increase in sales vs. the ability to absorb that work.”
There must be a penchant with the executive team to share meaningful finances that drive profitability from the ground up. This makes people feel connected to the business, gives them a sense of purpose, and helps them understand the “why” behind what you do.
How much transparency should there be when it comes to sharing financial information? Why is it important that everyone in your company be educated on basic financial metrics? Dig deeper into Solutions360’s resources to learn more.
Want more? Watch the entire video podcast conversation on the Navigate Management Consulting YouTube page.