Recently, our CEO, Brad Dempsey, joined Brad Malone on the Navigator podcast.
This episode is part of Navigate Academy Module 4
Project-Based Financial Concepts
In terms of maturity, Solutions360 sees a wide range of integration companies.
“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 with an opportunity to do something – all the way up to very professional companies that are even ISO certified.”
“If I had to pick out one key indicator that I see in an integrator that is really crossing that chasm, it is that they have embraced project management as a profession and have a lot more structure and process behind their project management.”
Here are three key project-based financial metrics that Solutions360 believes integrators need to measure:
Gross Margin Erosion
“One of the things that a company must do is have a target gross margin that they know covers their overhead,” Dempsey reports. “And it’s very important from the time you create a proposal and you build a solution for a customer and get that deal and book that deal, that you maintain that throughout the life cycle of a project, and that includes a couple of different aspects in particular. It’s very important that you’re measuring on a daily, weekly basis. You need to keep revisiting where your current margin is compared to where you sold it. And if you do that on a finite enough basis, you have enough time to actually do something and try and fix challenges from their projects.”
Gross Profit Dollars Per Hour
One of the most limiting factors for every company is your 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 and trained and working effectively. So, if I have a thousand person hours of labor available, and I look at the deals that I could have those people work on, and then I divide the gross profit by the number of hours, that gives me my profitability with a mix of equipment and services and that overall solution that I’m selling to the customer. The higher I can get the gross profit per hour, the more money the company can make without investing in more labor and more expense.
“A key distinction is that you’re talking profit and so many companies view revenue as that primary metric. And it’s a number, but it’s not money. It’s just the potential for profit,” says Dempsey.
Backlog
Backlog is the difference between what we’ve actually sold and have a financial commitment to, (meaning we have some kind of purchase order or some kind of a legally binding deal with the customer), versus what we’ve actually delivered or executed. The difference between those two things is backlog.
“Now, backlog has inputs and outputs,” says Dempsey. “The input, or sales orders, your bookings, and the output is your execution. So 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, as opposed to it may be sales are great and I need to increase capacity. So it’s those three moving parts together, which I think at the portfolio level are very important for projects.”
Revenue is for vanity. I would go as far as saying you have to run your business on gross profit, and you should measure your business on gross profits.
What level of information do we want to share?
There must be a penchant with the executive team to start sharing finances.
“We want to share information that makes people feel connected to the business, gives them a sense of purpose, makes them understand why, what you do. And when you can put that hand-in-hand with the right kind of education, I think that can be a very powerful tool for a business,” Dempsey concludes.
How much transparency should there be when it comes to sharing financial information?
Why is it important that everyone in your company is educated on basic financial metrics?
Listen to the podcast for all this and much more!
The Navigator Podcast Episode 4 with Brad Dempsey – Project-Based Financial Concepts
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Concepts of Process Management
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