The first steps in taking control of your firm’s financial success should center around the billing cycle, timesheets and, most importantly, the backlog.
December 28, 2015, was the beginning of my new path as the financial controller at Joseph B. Callaghan, Inc., a small consulting engineering firm specializing in repair, restoration, and waterproofing of buildings and facades in the Philadelphia area. JBCI had just celebrated its 50th anniversary and the company had just been sold to its second-generation leadership.
My predecessor, an accomplished professional with no formal financial training, but years of industry experience, was focused on the transactional aspects of the position – mainly paying bills and collecting money. Both extremely important for a healthy business. Upon her retirement, I stepped into a stable business with an incredible amount of potential. But how could I use financials and operations to help this already healthy company take it to the next level?
The best way to begin to create your company’s financial success is to set up processes. These should be intentional processes that align with natural fiscal periods – end of month, quarter, fiscal year. Without these processes, you’re working in a reactive mode. You’re not able to get ahead of the data and you start using it to make decisions. Mission: critical, if you do not have these three processes up and running in your firm.
Billing cycle. Do you have a consistent billing cycle? If the answer is no, this is your first mission critical item. Billing needs to be a routine process; therefore, all of the correct information is flowing to the proper channels and at the correct times. Every AEC industry-specific software has some form of billing instructions where the project managers communicate how much to bill and when to bill. Utilizing this module of your software is crucial and should be your first step to financial success.
For our purposes we bill our fixed fee projects biweekly and we bill all of our hourly projects once per month to ensure all timesheets are reflected in these billings. Not having a recurring cycle each month will not only delay the invoicing, but it will also delay your cash collections. Also, it is important to remember when invoicing it is not only for the benefit of your own firm’s financing but also for the client as well. Progress billing allows the client to break up the contract fee in smaller increments each month, rather than a large invoice quarterly or even worse one large invoice toward the end of the project. It is also usually easier for the client to approve small invoices which means getting your money quicker.
Reliable and accurate time. As you know, time is money for professional services. The definition of accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. The whole process begins with recording the transactions, i.e. time. Without up-to-date timesheets you cannot analyze, verify, or report any meaningful reports in the AEC industry. Tracking and understanding where employee time is spent and how much time is spent on each project is another main building block to understanding company profitability. There is a common misconception that the timesheets are a tool for the finance department, but tracking time allows real-time reporting for project managers to analyze their project budgets to ensure it is on target.
- Some tips to implement a consistent timesheet submission for your company:
- Keep the template simple
- Raise awareness as to why timesheets are important
- Use clear and consistent deadlines and publish deadlines publicly
Project backlog. Your firm’s backlog is a combination of all unbilled portions of awarded contracts. I believe this to be the most important financial metric, since this is the figure that drives revenue, profitability, labor resources (hiring), proposal targets, contract targets, etc.
Once you have some historical data, this metric is useful for projecting the firm’s future financial health when used with outstanding proposals and conversion rates. This offers decision-makers time to allocate resources and seek additional employees and resources before it’s too late.
Our firm’s most essential report is a combination of the following metrics by project manager. This weekly report helps look for billing opportunities, locate stale projects to eliminate from backlog, and find unbilled hours, among other uses.
- Billed to date and billed percentage
- Project effort to date and project effort percentage
- Last invoice date
It is also important to remove subcontractor portions of the contract from the backlog. If your firm’s fee, for example, is $20,000, which includes $5,000 for a subcontractor pass-through, then you have artificially inflated your firm’s backlog by 25 percent on this one project.
Understanding backlog makes it easier to assign new projects to project managers. By reporting each project manager’s monthly billing totals, take the backlog by each project manager and divide by the average monthly billing revenue to estimate how much backlog in months each project manager has.
These three financial processes of billing cycle, reliable and accurate time reporting, as well as project backlog reporting, are the first and most important processes to get correct before utilizing new financial metrics and reporting. For the past three years, I’ve been tracking these basic metrics and our firm has been able to have a clearer understanding of what’s coming, when we need to hire, and what projects and employees are most profitable. It has been both rewarding and fun to bring this knowledge and financial stability to our firm and I’m happy to pass this on to other firms so they can experience the power of finance.
John McCardell Jr. is the financial controller at Joseph B. Callaghan, Inc., a consulting engineering firm based in Philadelphia. He can be reached at firstname.lastname@example.org.