Many CEOs who run contracting or facility service companies are much stronger with the technical aspect of what their company does vs. the financial aspect. I was just the opposite. I grew up in the financial world. In fact, before running Roth Bros. Inc., a national service contracting firm, I was CFO of a $500 million company. Therefore, I am uniquely qualified to provide insight into how you can know the numbers that matter in order to successfully run your company.
Below I offer you a detailed list of the kinds of reports and meetings I relied on to stay on top of my company’s financial health and forecasts. You’ll see I advocate for a variety of types of reports. Don’t be intimidated by the quantity and variety. With practice, you will get familiar with these and the numbers will become as normal to you as the technical aspects of the business that you already know so well. And knowing the numbers is critical to business success.
Daily and weekly
Daily cash report – I got this report before noon every day. It showed by day for that week the beginning balance of cash followed by a summary of cash receipts from receivables and disbursements by major category to arrive at the ending balance. At the bottom, it showed me cash available and cash that had not yet cleared along with how much was left for me to borrow on my line-of-credit. On Mondays, I would get a summary for the previous week as well. From that, I would get a good feel for the financial health of the business. They say cash is king and it is true. Understanding daily what cash is coming in and where it’s going out was critical to me for funding our growth and providing the working capital necessary to support it.
There were 10 different monthly reports that I relied on. They are described in detail below:
- Three line job cost report – I had the accounting department reformat our job cost reporting into my three line report. It showed all the relevant job cost information but laid it out in a manner that had three months of information for each job. That way, I could quickly focus on jobs that were under-billed. I was 95% accurate in predicting that any job that had under-billings for three months (especially if they were increasing) was going to have a write down. I never had to go to a job site to determine this: Jobs are under-billed for a reason and the reasons normally result in a write down. I also focused on the cash flow for each job. Over-billings are great, but if the general contractor or customer is not paying them, they did not help my cash position. I could then easily look at trends in gp% by job to see if jobs were written up or down. We had over 300 jobs running at any one time, and this three-line report allowed me to digest the numbers and have specific follow-up questions in less than an hour.
- Backlog report – I developed a report that tracked backlog by division for the trailing 12 months by month and then for the month end for the past 5 years. History does repeat itself, so following the backlog trends over time gave me insights into whether or not we were on track to hit our growth targets.
- Preventive Maintenance (PM) report – I developed a report to show the change (highest change to lowest) by month of the annual value of PM contracted amounts by customer. This quickly allowed me to see if we lost any PM customers and to also see who we added that month. This was critical because the overall revenue to PM contract amount for us was 2.5-3.0 to 1.0. I could then follow up on why we lost any service customers and spot trends. I could also see if the growth of our PM contracts was sufficient for us to hit our growth targets.
- Income statements, balance sheets and statements of cash flow – The monthly income statement was compared to last year and budget/forecast by division and on a consolidated basis. I will discuss the trailing 12-month revenue and operating profit report that was far more meaningful to me in the next section. For the balance sheet, I would track the ratio of current assets to current liabilities. This is a critical measurement of the health of a growing company. This measurement–along with the cash flow from operations on the income statemen–tells you if your income statement is real. For example, if you have positive earnings but negative cash flow from operations, something is wrong. CEOs don’t have to know the answers to why this is so, but if it’s your business, you should know enough about the numbers to know if things are good or heading bad.
- Detailed balance sheet – I developed a report that listed out all the trial balance accounts and compared the current month with the prior and the same month of the previous year. Again, it gave me a quick way to drill down with questions on material changes and gave me insights into the business.
- Accounts receivable analysis – I developed a report that aged the receivables by division. Any amount past 90 days needed an explanation from operations. I then met with the leaders of each division monthly to review this report, get follow-up on outstanding invoices, and get feedback on why they were outstanding. You can learn a lot about how your operations are performing in terms of quality by finding out why people are paying you late. I also reviewed any cancel and re-bills to make sure invoices were not being re-aged to avoid the process. Because of this discipline over receivables, our write off percentage was very low.
- Inventory aging – I developed a report that showed the dollar amount of inventory by category and then calculated the average days of inventory. This quickly showed me if we were buying smart or had obsolete or slow moving items. Again, I could quickly ask questions to drill down.
- Safety – We were obsessive about safety reporting, so in addition to the normal OSHA reporting, we measured near misses and violations. We created a safety incentive program for each field worker in which they started the year with $500 and that amount was reduced if they didn’t follow our safety practices. Each member of the management team also had 15% of their bonus tied to safety results, so from top down we were invested in safety. This did two things: First, it reduced the number of claims we had which resulted in real cash savings because we were self-insured; second, it was consistent with our culture to send everyone home in as good or better condition than they were when they showed up for work. High numbers of safety incidents also are an indication of complacency of oversight, poor attitudes and sloppy field planning and execution.
- 12-month trailing – This report graphed revenue and operating profit as if our year-end was the 12 months ending each month end. This was a very telling graph in that it showed trends, up or down, before they actually became reality. If you’re not doing this yet, start tomorrow. It’s graphical and is a quick tool.
- Previous year actual + X = full Year vs. Plan – I came up with this report to highlight operators who were fooling themselves regarding their forecasts. Say, for example, that it was the end of May and an operator was 20% below plan but even with the last year through five months. Now the catch is, the remaining seven month plan plus the deficit for the first five months would require performance that was 150% that of the prior year period. This made it easy for me to ask, “If for five months you had the same performance as last year, how are you expecting to outperform the remaining seven months by 50%? What is going to change and why?” This would inevitably result in the full year forecast being lowered to a more reasonable number. Again, a quick tool for great insight.
In addition to the reports that hit my desk on a monthly basis, I also held regular monthly meetings to keep me informed about the business’s financial health:
- KPI meeting – Before this monthly meeting, the management team received our KPI reporting which measured those factors most critical towards achieving our strategic goals. The first KPI we measured was PM. We tracked the beginning PM balance, new PM growth, losses, the net change and the ending balance by month vs. the growth goal. Each operator had to explain why they were ahead or behind goal and, if behind, had to explain to all their peers and me what they were going to do to get it back to goal growth. This was a very powerful session.
- Sales funnel meeting – During this meeting, each operator had to discuss the realities of their sales funnel by percentage, including probability of closure and the timing of the closure. Having to present this information month after month to the same peer group and to me didn’t eliminate BS, but it gave me insight into the potential growth rate.
- Open discussion time – During meetings, there was always time for open discussion on the agenda. During this time, we would discuss anything any of us felt strongly about that could impact the business. This was a powerful session because I allowed it to be free flowing vs. dictating the interchange.
The quarterly meeting
Once per quarter, we would have broader off-sight meetings involving the management team and all our direct reports. I was the only member of the management team who gave presentations. All other presentations were done by the direct reports of the management team members. This was a great way to experience the next generation of leaders and to see them interact. In addition, we always had some kind of team-building session along with the business sessions to promote communication and relationship building among the next generation of leaders. If I miss anything about running Roth, I do miss working with the great people we have in the next generation of leaders.
I know this extensive list of reports and meetings can be a lot to absorb. However, if you implement these reporting practices that give you insight into your business’s financial health on an ongoing basis, you can run your business efficiently yet effectively. The key is to understand the numbers that matter to stay ahead of the game!