P&Ls aren’t the best financial indicators if you want to know how well your company is performing financially.
Don’t let big sales numbers distract you from what’s really happening with your company’s finances: That’s the advice we got from Kevin Miller, Coitcom’s president, when we asked about the financial indicators he uses to measure the health of his integration firm.
NSCA recently invited Miller, along with other leaders within the commercial integration industry, to join a virtual roundtable conversation on the financial indicators and considerations that are critical to profitability.
If you missed it live in June, the discussion is worth listening to on-demand, with lots of specific information about how to lead company finances in uncertain times, as well as the sales KPIs you should track—and how to track them.
One of the most valuable topics we covered centered on profit and loss statements (the good old P&L): Are they a good indicator of how well your company is performing financially?
The answer from everyone seated at the virtual table: No!
“It took us a while to realize that a huge percentage of the numbers that hit the income statement and the P&L traces to orders that were booked six, nine, or 12 months ago—or even longer,” explained Jerry Bernard, owner of Kansas City Audio-Visual (KCAV), during the webinar. “It doesn’t paint a real-time picture, and it can create a false sense of profitability and security.”
What should integrators be doing instead of relying on P&L statements? Here’s what the experts we talked to say they trust instead when it comes to financial indicators.
Using Quick Ratios and WIP
At Coitcom, Miller uses a quick ratio or cash ratio as a financial indicator, essentially evaluating the ability to pay short-term debts using liquid assets.
He also examines work in progress (WIP). “This could be something we are buttoning up tomorrow after working on it for six months, or it could be a $700,000 signed PO for next summer.” But he cautioned that it’s always critical to look deep into your WIP. For example, 10% of a $10 million WIP may not show up for another nine or 10 months.
He said this approach—evaluating WIP and relying on a cash ratio—has saved Coitcom from many headaches and hard times, especially within the past year. As the team watched business slow down, with little to no new work coming last summer before things started to ramp back up, there would have been many opportunities to misrepresent the situation or get lost in false senses of hope.
“If we had looked at it from a very high-level view, we would’ve thought, ‘We have great work in progress. We’re busy. Things are good.’ But they weren’t,” Miller described during the webinar. “We would’ve run out of cash in the middle of the summer and not made it to the fall and winter months, when all these great projects were coming in.”
Comparing New Orders This Year vs. Last Year
For Bernard and KCAV, it’s about tracking new orders—specifically comparing the orders placed this year to those placed last year at the same time.
“Depending on your vertical market, new orders can give you a pretty good lead time,” Bernard said. “If you’re working in healthcare, for example, then you’re probably not delivering that project for six to nine months after you receive that order. That means you have a six- to nine-month window to ramp up or scale down to drive the best performance from your P&L.”
To gather this information, said Bernard, it’s important to ask sales managers to share monthly sales commits. Ask them: What’s the new order level for next month, the following month, and three months out? Then, you should measure whether these commits are coming to fruition—and keep your operations team in the loop either way.
“Rather than using a single month, my suggestion is to use an average of three or 12 months,” he emphasized. “A single month tends to look like the heart-rate chart of a very sick patient. It spikes. It dips. It goes all over the place, and you can’t learn a lot from it. One big order could skew your averages.”
Bernard also warned webinar attendees to remember this: When asked to report on sales activities, some salespeople will be optimistic, while others will naturally lean more toward pessimism. For this reason, the projected sales pipeline may not tell you as much as you need. Train your sales leaders to create forecasts based on what they see in the pipeline, and make it permissible for them to deliver news that you don’t want to hear. (In other words, keep your emotions in check if you’re receiving bad news.)
Your Source for Industry-Specific Financial Insights
Now more than ever, the key to coming out ahead is empowering your financial leaders to make changes that protect your integration firm from vulnerabilities while also supporting profitability.
If you want to listen to the entire conversation we had about financial leadership and driving profitability, visit this link at any time.
If you have any questions about what we covered in this article or the KPIs discussed in the roundtable conversation, we’ll be glad to connect you with any of the experts who joined NSCA for this vital industry conversation!
5 Forward-Looking Financial Metrics to Measure
- Sales commits (30, 60, and 90 days)
- Bookings (Trailing 3-month basis to prior period, trailing 3-month basis to prior year, trailing 12-month basis to prior year)
- Total backlog gross profit
- Opportunities (3 to 9 months out)
- 90-day cashflow forecast
