A certain contracting business is very lucky. It's still in business today when it should have been in bankruptcy proceedings some time ago. In fact, there is now actually a chance that it will recover and prosper.
Still, the owners are very lucky to remain in business. How did they get in a sticky position in the first place? The owners, you see, operate with virtually no financial information.They bid jobs, win some, complete them - and have no idea if they made or lost money. Apparently, they have made money on at least some jobs.
The owners knew everything that was going on when the company was doing only one project at a time. But now that they are into several proj-ects simultaneously, they can no longer rely on memory. They are, after all, only human.
Their initial systems produce a financial statement only once a year. Their bank accounts are reconciled monthly but usually are several months behind. In addition, there is no detailed record of project profitability.
The operational systems are even worse. Company crews and subcontractors are not coordinated. So, at various times virtually every day, some employees are not productive. Materials needed in a hurry are purchased at a premium.
Mom-and-pop organizations can operate with informal systems if both mom and pop have really good memories and the cost of a real system of financial control is not outweighed by the benefit.
Growing organizations, however, require sophisticated systems to ensure operational efficiency and informed decisions.
A company that undertakes major projects needs a system to ensure that (1) the bid is based on a list of all required materials, parts, equipment and subcontractors; (2) there is a reasonable estimate of the time required as well as the cost of project components and financing; (3) there is frequent follow-up to ensure that the project is on budget, both in terms of material costs and employee time; and (4) appropriate actions are taken when unplanned issues arise.
The systems for this type of control should be integrated with the accounting system, which then can produce regular reports on project profitability, cost of financing, cost of and profit on change orders, and profitability by the project.
Why all these reports? To identify the lowest-cost vendors, most efficient crews and most effective supervisors; to identify errors in bids and preclude their recurrence; and to allow for better project planning. They also allow cash planning for orderly growth.
Good planning and controls will reduce the amount of "shrink" as well. "Shrink" is that portion of company assets, generally inventory or small parts, that is misplaced, sold but unbilled, or otherwise "evaporates" from job sites, warehouses or delivery vehicles.
Such systems need to be in place, and the owner/manager needs to see key indicators at least monthly. Key indicators include summarized information and those statistics and ratios that are the basis of informed, everyday decisions.
Some information needs to be seen more frequently. For example, cash and backlog on a daily basis, or at least monthly on long-term projects and more frequently on shorter-term projects.
How do you know if your systems are adequate? Well, does your accounting firm complain about performing routine detail work, or are they billing you for it?
Do you get concise information from your accounting department that is accurate and provides you with enough detail so you are comfortable using it to make important decisions?
Are you informed about operating issues via regular reports? Are vendors paid in a timely fashion, or is cash flow a weekly crisis?
Information is one of the keys to long-term success.
Our contractor, whose systems could not even produce a schedule for cash requirements for the next month, probably will survive. Why? Because they must be lucky!
Scott W. Pickett is emerging business services manager for Coopers & Lybrand.