Thoughts on financial reports

Getting the information you need on how to run your business in a timely manner is an absolute requirement for survival and success in the A/E business today. As business owners this has to be our expectation. If we don’t demand it we won’t get it.

That said, besides timeliness, there are many other considerations as it relates to getting financial information on our businesses. Here are some of my thoughts:

  • More is NOT always better. In fact, as it relates to financial information, more could be worse. Too much information obscures what is critical. This is one of my biggest pet peeves about finance and accounting types in our business. They dump information on us. Many times it is stuff we don’t need and obscures the stuff we do need.
  • Do your calculations according to the industry standard. What I mean here is if you compare yourselves to industry norms, make sure you are calculating the same way the industry norms were calculated. A good example is utilization. I have seen firms that published utilization percentages AFTER deducting for vacation and sick leave, whereas the industry norm is reporting it including those hours in the calculation. Therefore, the firm was patting itself on the back for how well they were doing when they weren’t.
  • Speaking of norms, don’t compare yourself to mediocre performers. I find that this is what most companies do. They look at their utilization, or labor multiplier, or days outstanding for AR, or any number of other data points on their performance in the context of the industry overall. I always think that is a bad idea. The industry overall is made of tens of thousands of 15- to 20-person firms that don’t do all that well. If the aspirations for your firm exceed those, please select appropriate norms to compare yourself to.
  • If something looks funny, dig into it. I see lots of mistakes in financial reports put together by people working in A/E firms. Some of them are even made by people who are CPAs. If you see something that looks like it doesn’t add up, ask questions. I find that the numbers frequently don’t add up. There may be a good reason for it (in which case you need to understand what it is and why) or, there could just be a messed up spreadsheet. Both happen!
  • Never take any income statement or balance sheet for what it says without probing. What I am talking about here is when I see firms that look like they aren’t making any money and then you find out they paid out a million dollars in bonuses with $7 million in revenue and the bonus dollars were all simply charged off to “labor” and expensed out above the profit line. This profitable company appeared unprofitable at first glance. Ditto for balance sheets with depreciated real estate on their books. Their equity could be vastly under-reported as a result. Or, they could have five-year-old ARs on the books that they will never collect that make them look stronger than they really are. It goes both ways.
  • Look to the future as opposed to the rearview mirror. Too much of the reporting and attention in our business is given to events that have already happened. We can’t do anything about those things. But what we can do is look ahead and make changes that will impact us in a positive way. That’s the real purpose of the number tracking from a management point of view. What predictive metrics are you tracking?
  • Share the numbers with everyone – and if not everyone, everyone who needs them. Everyone can potentially affect your performance in a positive way. Everyone needs reinforcement that they are doing the right thing if the results are good. Why not share this information?
  • Remember that people respond to what you measure and report! Measure and report on utilization, and you will have people who do a great job eating up labor budgets. Measure and report on effective labor multiplier, and you will have people who don’t charge time to jobs that they should be charging time to. Measure and report on business development hours worked and you will have a lot of time charged to BD.

What are your thoughts on this subject? Email me with any questions or comments!

Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.

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Posted in Archives | December 4th, 2017 by