Does Your Business Need a Local Coach?

Construction Coach: On the pulse

By Rob Popkey

Friday, 19 February 2010

Implementing systems and tools that keep a watchful eye on every profit variable will help when the economy rebounds.

Just like people have regular checkups to monitor their physical fitness, company owners and managers need to keep a finger on the pulse of the business to monitor its health. Particularly with an economic tsunami wiping out businesses today, it is important to have systems and tools that keep a watchful eye on every profit variable. That way, top executives can minimize the down cycles that impact profits and reduce the amount of time the owner has to invest in managing business.

Picture a ship that is crossing the Atlantic from Portugal to New York City. If the coordinates are off by just two degrees, it may end up in Newfoundland, Canada, instead. By continuously monitoring the appropriate gauges, a captain can recognize right away that the ship is heading in the wrong direction, identify the problem and adjust for the initial error.

A business owner who doesn’t keep a pulse on the business is like a captain who is taken by surprise upon arriving in Newfoundland instead of New York. Unfortunately, the error is common. Most businesses think they are monitoring conditions when they are actually driving while looking in the rearview mirror. By the time they face forward, they have either run into a sandbar or find operations so far out of control that it’s a struggle just to plug the leak.

Most of the information businesses use as guideposts is not real-time but historical data, and only permits reactive action. The profit and loss statements and other reports provided by financial accountants, for example, only review past performance and are at least a month behind. While accountants are necessary, giving them data and waiting for them to translate it into reports just delays getting actionable information into the hands of management. In other words, why wait for Monday’s paper to be published to find out who won the game on Sunday?

Real-time Information
Construction companies and other service businesses need to monitor and measure real-time information on a daily basis. It’s the only way to make informed decisions that guide the enterprise to the intended destination. One way to obtain that real-time information is for owners to stand over every project personally, but that would be impractical, if not impossible. The fact is, owners wear too many hats already, and so they should manage by exception.

Another method is to rely on people to deliver up-to-date information, but that is only a partial solution because any two people will provide different assessments. One may perceive the project to be ahead of schedule, while another may say it’s behind. Owners who rely on people for information need a complementary measure to validate the accuracy of what they hear from their staff.

The best real-time information is objective, which can only be derived from technology, specifically a dashboard, which works much like the dashboard of a car. As long as no warning lights come on, there is no need to worry, and thus owners can manage by exception.

Think of a dashboard as the management equivalent of a nail gun. Construction workers today no longer hammer in nails one by one, so why do the owners of their companies still rely on yesterday’s management practices, such as long-winded reports full of historical figures that keep them focused on the past? What they need is real-time, unbiased information that can inform them the moment the ship starts to deviate from its course so they can take action before things are out of control.

Dashboard Components
From the point a construction job is awarded, all of its key components have to be managed with the goal to deliver on time, on budget and on schedule. Working back from the final deadline and deliverable, contractors can create a plan that details the project’s stages, milestones and timelines. This tells them what needs to happen each and every day to hit each target along the way to the final deliverable. Further, they need to design measures to track the accomplishment of each target and progress toward the final goal.

Thus, a dashboard has to be designed to provide real-time data on all those project stages, milestones, targets, timelines and any variables associated with them, such as weather or materials delays. Further, every company and industry has its own constraints — how long it takes to get materials, how fast buildings can go up, how much productivity can be maximized. A dashboard can only produce realistic information if all those constraints are taken into consideration. For this reason, a dashboard has to be customized to each operation, its people and its industry. It’s not something one can buy off the shelf. Training is also required to make sure people take full advantage of all the dashboard can do. Those who have learned to utilize this tool fully will never fall back on their old habits.

Without a dashboard, owners can only get real-time information by being on site at all times to monitor what may be thousands of variables or by relying on people’s opinions to measure progress and success. Usually that means they learn about problems only when it’s too late. Why wait to be pulled over and get a speeding ticket when one can simply look at the dashboard and control one’s speed?

Back the Tool with Best Practices
Like any technology, a dashboard is only a tool. It has to be used in the context of four best practices:

  1. Establish standards. The human variables that are part of every business can produce inconsistencies when people are not held to standards set by the owner. In the absence of standards, employees will set their own, which are rarely as high as the owner’s.
  2. Measure. Like people, businesses need health checkups to prevent disaster. Once a project is broken down into its components and deliverables, measures and controls have to be designed to tell managers whether the daily targets are being met. Only in that way can they control the variables and adjust course if necessary. The more they can measure, the more they can control, and more control means more profit.
  3. Communicate. Communication, whether digital or in person, is necessary to establish accountability. Management has to know when a team has completed a task and has moved on to the next one, so everyone knows where they stand.
  4. Provide incentives. People are the key to the success of any operation. Therefore it’s important to be able to control and measure how they perform tasks, how they control others and how they control the variables of their work. Successful companies know that managing is about getting a group of people to work harmoniously toward the same goal. They have team-based incentive programs, which reduce the need for supervisors to stand over workers. Team members hold each other accountable to exceed expectations.

Continuing Education
Many construction companies are run by second- and third-generation tradesmen. These leaders tend to follow the family traditions. Usually, they are so immersed in the technical side of operations that they neglect to explore the innovative technology tools that could make running their businesses so much more efficient. On the other hand, the owners of construction companies that are profiting despite the economy continually educate themselves on new management tools so they can stay ahead of the curve. They don’t operate the way they’ve always operated, and they don’t manage on yesterday’s data. They measure and control their costs and schedules, motivate their people and deliver superior quality because they use real-time information produced by technologies such as dashboards.

A systematic financial review can lead to greater profits

by Mike Rudd

There are several elements within a small business environment that should be analyzed and reviewed to establish potential profitability as compared to current performance.

Financial statement review
In a review, three to five years of financial statements should be analyzed and categorized. Compare the performance of each category within the chart of accounts over the financial review time period. Categories should include types of revenue, variable or direct costs, indirect overhead, general and administrative overhead, debt service and leases.

Break down each dollar amount into a percentage of revenue to determine operational variances within each line item. Review individual circumstances that contribute to variances and their impact on company profitability. Combine the bestperforming percentages to establish the business�s optimal financial performance.

Quantifying financial impact
The financial impact of a business owner�s management practices should be reviewed.

Accounts receivable. Lack of consistent monitoring and specific collection procedures lead to reduced cash flow, restricted access to product and increased borrowing. By reducing the accounts receivable collection cycle, a business is able to increase the amount of cash flow on an annual basis, reduce borrowing and increase profitability.

Inventory analysis. In the case of a stocking distribution company, inventory is one of the single largest assets it has. The management of this asset plays a significant role in the success or failure of the business. Excess inventory on hand reduces profitability due to handling costs, breakage, shrinkage, reduced cash flow and increased borrowing.

Sales and margin mix. The gross margin mix of the individual revenue categories determines the overall margin available to the business for indirect overhead, administrative overhead and profit. If the product revenue mix is skewed toward low margin products or services, then the revenue stream will not compensate for reduced margins. Increased sales could actually lead to decreased profitability.

Break-even pricing. Break-even is the point of revenue generation that has covered the associated variable costs and produced enough gross margin to cover the company�s indirect and administrative overhead. Utilize break-even pricing to understand and create a pricing structure that allows for new product introduction and customer development and takes into consideration the inherent competitive advantage of additional gross margin without the burden of overhead.

Labor incentives. Increase labor productivity by developing and implementing excess profit-based incentive programs, performance job descriptions and management information systems. Average employee productivity can be increased, and the reduced overtime, reduced warranty, scrap and waste expenses, and additional capacity will increase profitability.

Reducing variable or direct costs. A business can reduce material costs by negotiating better terms or pricing, consolidating purchases, utilizing buying groups, committing to one supplier for annual purchases and reducing theft, waste and warranty work.

Review the performance gaps between your business and peers within the industry. Identify gaps in profitability, productivity, costs and financial ratios. That information should be combined with the problem costs associated with the lack of appropriate and consistent systems and controls, in addition to procedures that must be embraced and implemented to achieve desired company profitability.

Each business is unique and should take into account special considerations when establishing its viability.

Clients of The Fremont Group—and particularly those of Team Fremont—do a monthly financial review with our affiliate and find this one of the most critical, long-term benefits of our work.