Gauges

Feb 16, 1998

As an old car guy, I’ve learned that gauges are vastly superior to “idiot lights.” Idiot lights tell you when something has gone wrong, such as “engine hot” (it is now overheated). Gauges tell you when something is starting to go wrong, such as that the water temperature has gone from 180 degrees to 190 degrees (it’s rising). There’s a big difference. In many of the A/E/P and environmental firms we work with, the accounting systems often function more like idiot lights than gauges. They do a great job telling the firm managers when something has gone wrong. For example, declines in utilization rate generally indicate that workload is down. But to effectively run an A/E/P or environmental firm, we need early indicators that tell us something is going to go awry, so we can head it off before it happens. That’s when you start to manage the company instead of just going along for the ride. Here are some ‘gauges’ that can give you an early indication that a problem is developing or could develop soon: Number of inquiries coming in from new clients. Imagine how helpful it would be to know how many calls, letters, or faxes came in this month from potential clients who wanted a meeting with you or more information from you. How about if you had three years of this data? The ability to see if this number is trending upward or drifting downward could be invaluable in a number of ways. Yet most companies have no idea how many inquiries are coming in until they run out of project opportunities to submit proposals on. Total number of project possibilities being tracked. Another good indicator of sales that will (or won’t) be coming. Sales of new work. Good to know even if billings look strong. How much new work is coming in? If backlog is building, then it’s easier to spend money on new office space, computers, and hiring. If not, what can you do about that now? Percentage of business coming from current or past clients. This is your repeat business. For most firms in this industry, anything less than 75% or 80% is unacceptable. Marketing costs will be too high and the firm may be unprofitable as a result of its inability to keep existing clients satisfied. Most companies don’t have a clue on this one, either, until they start hearing that their reputation is not so good. Percentage of repeat business coming from each PM or PIC. This, too, is an interesting statistic. If you see this trending downward for any particular PM, you need to find out why and do something about it. Why wait until the complaints come in? By then, it’s too late— the damage is done. Cash flow deficit forecasted. Very few companies in this business forecast cash flow accurately. If they do anything at all, they figure out how much cash they need each month, divide that by 4 (or 4.3333), and this becomes the cash-in goal for the week. But tell me, whose cash flow is like this? No one I know of in this business. Doing this properly keeps you out of your line of credit, or at least reduces borrowing. You have to assign an anticipated date of collection to every invoice you create. You also need to schedule every payable the moment it comes in. The difference, every week, should be positive. If it’s not, take action. But don’t let the “idiot light” cash report (as opposed to a cash flow forecast) tell you that you have a problem when it’s too late to do anything about it! Average collection period. If it’s going up, it indicates that clients aren’t happy with you or that there’s something wrong with your collection efforts. Why not know that a problem is developing by constantly monitoring and reporting on this statistic, instead of finding out on a Wednesday that you have to hit the line of credit? Stock buy-back requirements forecasted. Very few companies really model this, either. Each year they find out, like a big surprise, how much they’ll need to buy out retiring or departing shareholders. But this shouldn’t be a surprise— 90% of the time, these demands could have been predicted and planned for. ZWEIG 100 optimism levels. This is an interesting gauge on our business. Check it out each month on the last page of The Zweig Letter. This tells you a lot about what will happen in our business before we wake up and find out we are in another recession for the design and environmental industry. Do you have the proper gauges on your company? Anyone who uses their vehicle to make a living (airplane pilots, taxi cab drivers, racing drivers) has gauges they rely on— why don’t you? Originally published 2/16/ 1998

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Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.