Some Firms Don’t Look Ahead
We got a fax the other day from a firm that wanted to cancel four seminar registrations it had sent in just a couple weeks before. Evidently, the firm had hit on hard times, had a staff layoff, and decided training was a cut-worthy expense— all since signing up four people for the seminar.
There’s nothing wrong with canceling (as long as it’s not too late in the process and we haven’t already committed to the hotel for a certain number). But it’s hard for me to believe these guys couldn’t see it coming. You wonder how companies that are hiring and training one week and firing the week after can last as long as they do in this business. As far as I am concerned, this kind of thing should never happen, yet it’s typical. We see decisions just like this one being made daily!
Owners and managers of firms in this business do not have the discipline to maintain the information necessary to look forward. And looking forward is what management is all about. But for whatever reason, many project-oriented people have a different idea about management. These people think management is all about how you react to unplanned crises! Don’t worry about why the crisis occurred in the first place, they say, just think about how you’re going to deal with it now. I don’t agree with this philosophy. Life is stressful enough as it is, and owning a firm is especially stressful when you don’t know what’s coming around the next corner! To stay out of trouble, here’s some of the data that you should be monitoring:
Average collection period/total collection period. The average collection period is based on how many days (on average) it takes to get paid from the time you mail the invoice to the client. The total collection period is the average collection period (in days) plus the number of days it takes you to get the bill out from the time you do the work. These are both measures of cash flow. And if the firm’s cash flow were getting worse and worse, I’d first be thinking about pulling my horns in when it comes to hiring or spending money for things that could be avoided. The next thing I would do is take steps to reduce the collection period!
Total of cash and accounts receiveable less line-of-credit and payables obligations. Some people use measures of current assets versus current liabilities in the form of a ratio as liquidity measures. I like to look at the dollar amounts of current assets minus current liabilities. Whichever is your preference, no matter. Having this data is critical to knowing what’s happening in the business. It is an indicator of how ready a firm is to pay its bills. Tracking this number keeps firms from “living off MasterCard,” as I like to call it. It’s not hard to get an unrealistic sense of well-being just by slowing up on bill paying or drawing on your credit line!
Number of inquiries coming in from past and present clients. This is hard to track but important information to have. Since we aren’t big on cold calling, almost every proposal opportunity starts with some sort of inquiry from a client. So you would think everyone would be monitoring this as a leading indicator of what’s to come. But that’s not the case. In fact, I’ve yet to see a firm that actually monitors and reports on trends related to this data. Why not? No discipline, no systems, no commitment to the idea. What else can I say?
Dollar value of proposals pending. I watch this like a hawk. When it starts to dip, I start getting worried. That spurs me (and others) into action. Again, my experience is that the difficulty A/E and environmental consulting firms have with capturing this information is that they don’t have any discipline. No firm will force everyone to send every single proposal, letter proposal, or extra services agreement to one place so they all can be tallied up.
Sales of new work. Some firms know this, but most don’t. The preponderance of firms in our business think they’re doing great if they are billing like mad and collecting somewhere close to what their invoices indicate they’re owed. Yet you could have great billings and great collections, and still be heading for the unemployment line if sales are down! Sales are what it’s all about. If they are trending upward, at least you have a shot at making a profit and having good cash flow. But try making a profit and having sustainable cash flow if you aren’t selling anything. It doesn’t work!
Backlog and monthly revenue projections. Why wouldn’t a firm track this? I don’t know because I can’t imagine living without it. I guess the main culprit is that many firms simply don’t have the gumption to force their principals and managers to supply a fee budget in order to open a job number. Without a budget, you can’t track backlog easily.
Subjective input from the managers. I wouldn’t ignore this one either. Your front line managers can tell you whether they are winning the battle in the trenches or not. I would make sure to sit down and talk periodically with all those who control people and projects to get their read on what the future looks like.
Originally published 2/07/2000