Bookkeeper to Financial Manager: How to Handle All the Data at Your Disposal
June 24, 2020
Over time, many architecture and engineering (A/E) firms will make the transition from simply having a bookkeeper who ensures that bills get paid and invoices get sent, to empowering their accounting person to be more of a financial manager.
We’re sometimes asked to help firms undergo that type of evolution, either to Factor AE or another system. What we observed in a recent engagement like this involving another accounting package confirmed a few things we’ve known since Factor AE was first introduced. First, there’s such a thing as too much flexibility in software. A system’s ability to provide any data you could possibly ask for isn’t nearly as important as the behaviors the software helps you reinforce or do away with. Second, when you give people access to large volumes of data, you have to provide some guidance on what to do with it.
When the Data You Need Becomes the Proverbial Needle in a Haystack
The client in question was looking to make better use of their financial data, and they asked their bookkeeper to take on more of a financial management role. What this person quickly learned was that she had to change her mindset about her role and level of participation in the management of the firm.
Faced with the almost overwhelming amount of data now at her fingertips as a result of the new system’s flexibility, she initially chose to simply pass everything along to the principals when they asked for details about the firm’s performance. She figured that what they needed was in there somewhere. Unfortunately, since the owners of this firm (like most) don’t have a financial background, they were unable to “ferret out” the information they required.
In fact, they commented that it was almost worse to have a huge volume of data and not know how to use it than to not have enough data. Having paid for and implemented the new system, it was demoralizing to realize that they weren’t getting their full return on the investment.
Information: Availability vs. Usability
In the course of getting their new accounting system up and running, this firm became fixated on the availability of data rather than its usability. The first problem created by this fixation—the financial manager just dumping data on the principals—was easy enough to fix. They simply let her know that that was not acceptable, and then they all sat down to try and determine what information was necessary and helpful. However, that exercise didn’t achieve the desired goal. Even after paring down the data provided by the system, the volume was still staggering.
The second problem or challenge was to boil down the information even further and find the metrics that actually matter to the firm. They needed to get their heads around what success looks like for them. KPIs that are important to one firm based on where it is in its evolution may be relatively meaningless to another based on its lifecycle.
For this company, which was contemplating an ownership transition, what was most important were the day-to-day activities that could increase the firm’s value. They had a formula for growing their valuation and knew what numbers to plug in. They just needed to know which metrics could improve those numbers and increase their valuation.
"The key is to identify your economic denominator, develop a deep understanding of how to manipulate it to improve your results, and use a system with built-in guidelines that keep you from straying from your target KPIs."
Identifying the Origin of Profit: Finding Your Economic Denominator
One of the things we discussed with this group was that profitability is only one measure of the success of a firm and therefore its valuation. Profit is important, to be sure, but it’s not the most important number, and it’s also not a very granular measurement. There are many things that can push profit up or down.
This firm had, for many years, been guided by Jim Collins’ business classic “Good to Great.” He referred to what he called a company’s “economic denominator” or “profit per X” as being a key to its success. The challenge for management is defining X such that when that value is maximized, the value of the firm increases right along with it. And this is no easy exercise.
Profit per hour might look like a good choice, especially if most of your jobs are hourly. But if you’re moving more toward lump-sum jobs, as so many firms and clients are, hours can’t be your number.
What we’ve found to be a good economic denominator for the A/E firms we work with is net revenue per person (NRPP). In fact, that’s why it’s one of the “Big 5” KPIs in Factor AE. It’s a good mix of profit per hour and profit per person because it’s not hour-dependent or profit-dependent, but both the main components of profit are included. This figure also gives you a good perspective on marketing and sales, as success in those areas will drive up revenue.
So, the firm we were working with decided to focus on NRPP as its denominator. In doing the math, they determined that they have a pretty good figure but discovered that they are essentially balancing the books using free overtime. They have 15 people but their full-time equivalents (FTEs—the total number of hours worked divided by 2080, the number of hours worked by an employee annually) were 22. That meant that some salaried people were working many more hours than they were getting paid for. As a result, their NRPP looked great, but their net revenue per FTE wasn’t so hot.
Next, we decided to look at their net profit per hour worked each month. Optimizing this number provides many benefits, including fewer missed deadlines, less employee burnout, and happier clients… all of which contribute to a higher valuation. Ultimately, they decided to use this figure as their economic denominator.
The Service Behind the Solution
What the engagement described above highlights is that for firms to get the most out of their project and profitability management solution, they need guidance on how to move through that type of assessment and financial evolution. This involves helping bookkeepers take on the role of financial manager and assisting firms as they zero in on the couple KPIs that will enable them to achieve their objectives. Unlike the firm we profiled here, a recently formed, aggressive firm may want to focus on cash flow and profits.
The key is to identify your economic denominator, develop a deep understanding of how to manipulate it to improve your results, and use a system with built-in guidelines that keep you from straying from your target KPIs. This map then helps a financial manager give principals the information they need to ensure that the organization succeeds.
Handle A Lot of Data with Factor AE
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