Let’s face it, businesses are complex! With an intricate web of relationships – employees, clients, vendors – to manage, new project details flying at you from every direction, continual product and technology advancements, volumes of data to store and organize, and more, running a business is not only exhausting, it's relentless. Yet, even if you manage to keep a handle on all these details, a systems integration business, like any business, is still at risk if the business leaders don’t keep a close eye on financial results, forecasts, and trends.
Like road signs, financial metrics serve as guideposts. They tell you if the road is clear and you can proceed at maximum speed, when to slow down, when to accelerate, if you need to change course, and whether caution is advised. Some of these guideposts are highly visible, while others may be less visible and hard to interpret when they do come into view. All considered, which financial metrics matter the most, and why?
Relating financial metrics to this precept, one quickly surmises that financial reports – income statement, balance sheet – present data on what happened in the past. Most would agree that it is virtually impossible to control the past. For that reason, top line revenues, gross margin, EBITDA, and cash balance are critical pieces of data to know, but not overly valuable to help guide business decisions on a go-forward basis.
Instead, I prefer metrics that provide an indication of what can be expected in the future. These figures are more valuable and more manipulable.
A Sales Forecast is an approximation of future business (in dollars) derived from a probability-weighted list of projects that are likely to close in the next 30-, 60-, 90 days, etc. For improved clarity, Sales Forecasts may be broken down by salesperson, office, and expected close date, but the figure that matters is the total dollar amount that will likely be added to the company’s current project backlog.
The Project Backlog is the amount of total work under contract that has yet to be delivered. In other words, it is the aggregated resale (or contracted) value of equipment that has yet to be purchased (or allocated) and delivered to site combined with labor that has yet to be performed for all projects in process. Of course, like with the sales forecast, companies often opt to break down the backlog by project, equipment vs labor, office location, and even assigned project manager, but again at the end of the day it is the overall figure that matters.
For improved visibility, the combined sales forecast and project backlog can be extrapolated out over the next several months to gain a fairly accurate prediction of revenues that can be expected on a month-by-month basis going forward. Armed with historical data from your income statement, financial team members can then approximate the gross profit and net profit amounts the business can expect in the upcoming months.
Switching gears, the third financial metric that system integrators should keep a close eye on and actively manage is Labor Utilization because it is the greatest variable when it comes to determining a company’s gross margin. Essentially a measure of labor optimization, Labor Utilization is defined as the number of hours spent working on the job or jobsite (numerator) divided by the total number of hours paid (denominator). In addition to driving improved bottom line results, actively managing how well labor units are optimized can help to neutralize the labor shortage by increasing labor capacity and decreasing the need to hire.
While undeniably worth the effort, it is important to note that developing and maintaining a sales forecast, tracking your project backlog, and reporting on labor utilization is time-consuming and requires tedious attention to detail UNLESS your business exploits the power of D-Tools System Integrator (SI), in which case all of these reports are generated automatically for you.