Doing More with the SameSeptember 6, 2017
Doing more with the same is one of the fastest ways to improve efficiency and profitability. In some form or fashion every contractor understands this premise as it relates to the job site. But the same principle can easily be applied to a company’s financial reporting. Internally and externally droves of data are assembled. This data can be easily compiled into practical and useful tools to correctly improve your profitability. It can also provide the timely insight traditional financial reporting like financial statements or tax returns deliver but in a much more “real-time” manner.
Timely reporting of financial data is a key to better bottom line results. Most companies have timelines of reporting which can be measured by calendar weeks, months, quarters or years. Often however, those documents can be bogged down in both assembly and comprehension of what is being delivered. For financial reporting to provide current beneficial data, companies must be able to shrink the number of days between the period being reported on and when the actual data is disseminated. If management is reviewing internally prepared monthly financial statements 10 days after the previous month end, then they have 20 days to change direction and achieve new monthly results. However, if the reporting delivery timeline is longer, say 45 days, then that following month has already been lost.
One option for management to shrink that timeline is to prepare reports which summarize key individual financial components. They do not reflect the financial position of a company as-a-whole, but rather report on accounts or relationships that impact financial statement elements. They can focus on assets like receivables and how quickly they are collected. Another key indicator could be weekly payroll costs period to period and year over year. These items are more easily summarized and distributed at the end of a given period and can be highlighted in a one-page summary for management to digest. These quick feedback reports shrink the timing gap and allow management to implement change in the very following reporting period. Spreadsheets today can easily be created that allow for the importing of data from the general ledger software and then polished into timely snapshots focused on management’s specific areas of concern.
The development of these reports and their implementation will allow management to monitor and modify their business plans. The smaller time periods between reporting will allow for a greater impact on the bottom line. However, management can do more than just shrink the timeline, we can populate those reports with data that is captured simultaneously but not normally included in the company’s general ledger. By cross-pollinating financial data with non-financial data, we will build benchmarking tools which can drive better operational efficiency, as well as reducing overall company costs or prolonging asset benefits.
Many general ledger accounts maintained by a contractor have measurable items that can create valid economic indicators. Payroll costs are a universal expense to most contractors and an account in the general ledger. Labor hours is a non-financial number which is closely tracked and reconciled simultaneously. A well-managed company understands its costs of payroll and how an extra job hour impacts the overall profitability of the project. Management could dive deeper and can cross reference those numbers to units of production. Then we would have a tool for management to evaluate tangible output results with actual costs and compare to other company-wide labor production areas.
Let’s assume we have two masonry crews. The two crews have an unequal number of members, do not necessarily work on the same projects, but each member’s pay rate is in a close range to the other. If we monitor the number of cement blocks each crew consumes (installs), we can create a block per man per hour rate. This rate can then be used by management to evaluate the two crew’s efficiencies and level the playing field. The numbers required for the analysis are all assembled for other reasons, now we just need to gather and apply to the desired task at hand. Using an Excel table, management can build by reporting periods these production numbers and costs to compare from one period to the next. As the spreadsheet is populated, a reliable trend and history that will assist management in evaluating performance will develop. Watching the trend of payroll to blocks consumed can identify early in a job’s life operational inefficiencies.
While the example above is rather basic, it highlights how data from different areas can be pooled for a more impactful financial tool while adding very little cost or reporting burden to the accounting system of a company. Actually, it has the reverse impact as it highlights the power and value of the accounting system which is often viewed as an overhead burden and not a revenue generator. The investment in the accounting software can be measured here in the ability to access and track these ratios.
Developing ratios to supplement the regular financial reporting of the company will require a solid understanding of your business operations and goals. When building such ratios, pulling data from three sources or more will have the greater impact and provide deeper results. Those sources should include the accounting numbers, employee costs in dollars and hours, project materials & consumables like fuel in a quantity format like tonnage, gallons or pounds. Often, we incur shop costs for the fabrication of small parts consumed on the project or for repairs and maintenance to equipment and vehicles. This is sometimes a much-missed area where efficiency can be gained. Understanding the on-going maintenance costs of equipment may eventually lead to a better capital equipment purchase plan as we identify the tipping point for equipment to be replaced.
When bidding detailed and more complicated job projects, we see contractors using a variety of overhead rates to capture those expenses above and beyond direct costs. Those overhead rates are normally detailed to capture many of the “shared” costs a company incurs to keep the lights on and running. However, we also see quotes going out for “time & material” type of work. The overhead rate quoted in a project bid may not be competitive enough in these smaller yet profitable opportunities. The development of a pay envelope rate may provide the trick. We should break out the various costs associated with paying an employee their weekly salary. We should know the direct labor cost, related payroll tax cost, insurance, especially workers compensation, fringe benefits like retirement or health coverage, uniform allowances, meal money etc. That envelope rate should be tracked by pay period and used for those quick quotes. By tracking regularly, we know we quote with solid costs to make the work as profitable as possible.
Optimizing the data already captured will allow contractors to have deeper understandings of their costs structures and improve their chances to increase profitability. It will also demonstrate the need for regularly evaluating the results and looking at what the trends identify. To discuss further, contact Bill McNamara at firstname.lastname@example.org or call 732-747-0500. The Curchin Group, LLC is committed to providing a broad range of financial services to meet the needs of the construction industry, today, tomorrow and even 30 years down the road. Our clients benefit from the seamless delivery of financial services by a cohesive team of professionals working together.