Friday, December 09, 2011

SOP Friday: Running Regular Financial Reports

It always strikes me as odd that business owners hate dealing with money. I know, we didn't get into business to count pennies, balance QuickBooks, and mess with the messy side of finances. But this is not a hobby. We did go into business. And businesses exist to make money for their owners.

I've written several articles about finances, especially some year-end commentaries. You should add them to your SOP reading (see "Related Articles" at the end of this post).

This article is about the Financial Reports you should be running on a regular basis. "Regular" does not mean every report needs to be run every month. There are weekly reports, monthly reports, quarterly reports, and annual reports.

Setting Up QuickBooks

As you know, you need to set up QuickBooks with the correct categories so that you can track money. Your details will be different from my details. But however you set up your categories, you need to keep track of three primary elements: Income, Expenses, and Profit. For our purposes, income and revenue are interchangeable.

Never, ever, ever confuse revenue with profit. Revenue - Expenses = Profit. Everyone wants to brag about the client that pays them $10,000 a month. I'll take a buncha those. But no one brags about the client who costs $9,500 a month to support. Here's why.

Let's say client #1 brings in revenue of $1,000 a month and costs $500 to support. Profit = $500.

Let's say client #2 brings in revenue of $10,000 a month and costs $9,500 to support. Profit = $500.

Which client would you rather have? Client #1 - because they're a LOT easier to support. That "big" client is a pain in the butt. I know that because they used to be my client. I fired them because they were taking all the administrative time in our company and producing the majority of stress in my life.

How do you know whether a client is profitable (and how profitable)? Well, you need to set up your QuickBooks properly. Then you need to use it religiously. You need a good PSA system, and you need to use it religiously.

One of the key things we had to work out with both ConnectWise and Autotask is the accurate tracking of time spent on a client. This includes all the unbillable or "covered" time that's included in managed service agreements and projects. We like to run flat-fee projects. It is critically important to keep track of time so that we know whether a project (or a month of managed service) is profitable or not.

I have covered this extensively in the Super-Good Project Planner for Technical Consultants and in various articles and audio programs.

If you spend 40 hours on a project that brings in $5,000, are you profitable? How do you know? What do you track? What's your real cost? Between QuickBooks and your PSA, you should be able to figure this out.

Weekly Reports

Your only real immediate need for information has to do with cash flow. Can you pay the bills coming up? Later this month I'm going to present our Cash Flow Weekly Procedure. Bascially, you need to track all the money that's coming in and going out so that you know what needs to happen between now and the next payday, or between now and the end of the month. Keeping track of finances in real-time will give you great clarity on what you should be doing with your time.

Another weekly report you should run is employee utilization. It's not as critically important as cash flow, but employee utilization reports provide you with some very important variables you need to track profitability -- and to make accurate estimates for future profitable projects.

Employee utilization reports tell you how much money you're making on each technician. To do this, you need to have your PSA set up properly . . . and you need to be using it.

Employees need to keep accurate track of their time. That means they need to be working in real time. When that happens, you can accurately track time spent on administrative tasks, managed service labor, and truly billable labor.

For small shops, don't be surprised at all if your technicians are about 50% billable. That sounds low, but there are all kinds of reasons for it, especially if you don't bill for travel time. When technicians drive all over the county doing small jobs, the billable percentage goes down. When they sit at their desk doing remote support, billability goes up.

Let's say you have a tech who is paid 40 hours a week. You have one big service meeting and two little ones in a week. That's two hours. He spends an hour each day checking email (4 x 15 minutes). That's another five. If it takes 20 minutes to drive to the average client and he visits two clients a day, that's 400 minutes a week or about 6.5 hours. And, because you're a nice boss, you pay him for half an hour a day to study for the Small Business Specialist exam. That's another 2.5 hours. Total non-billable time is 16 hours.

24 billable hours divided by 40 hours = 60% billable.

(Note: That "billable" time might be covered by managed services. Don't confuse yourself around this. You are being paid for it. You need to track it as billable time to differentiate it from truly not-billable time.)

How do you use this number? We'll have a separate SOP article about that. But here's a quick example. Let's say a project takes 60 hours. Your tech is 60% billable. Therefore, you need to pay your technician for 100 hours in order to have 60 available to sell on the project.

Monthly Reports

In the End of Year Finances - Pt 2 article referenced below, I talk about some of the monthly reports you need to generate. These include:

1. Largest Months. This is a list of the largest sales months in your business history. I produce a list of the twelve largest months. Ideally, these will be the twelve most recent months, but that's just not the case. If the month just finished is on the twelve largest ever, then you have an update to this report. Otherwise, no update.

2. Most Profitable Months. Remember, the largest sales months are not the same as the most profitable months. Ideally, they will, but that's not the reality of the business world. This report is interesting because it keeps your analytical mind aware of the fact that revenue and profit are not the same. When your emotional mind gets excited about a large sale, your analytical mind will step in and inquire about profitability.

3. The Largest Clients. You might report this for the previous twelve months, three months, or one month. In fact, you could substitute "Most Profitable Clients" for largest clients. The report you choose to generate is not as important as the fact that you generate it. You and your employees should know where the money comes from.

Sometimes, loud and troublesome clients are not the largest, or the most profitable. Don't leave a $5,000/month managed service client hanging because a break/fix pain-in-the-butt client is making a lot of noise.

There are many other reports you can generate, but don't get too fancy unless you business is large enough to actually get value from the reports. This might include

- The total number of service requests opened and closed in the previous month
- A breakdown of Priority 1, 2, 3, and 4 service requests in the previous month
- Clients with the most SRs in the previous month
- Clients who consumed the most hours in the previous month
- Average time to close a P1 service request (and P2, P3, P4) in the previous month
- Earnings per employee
- Sales per sales person
- EBITDA % (earnings before interest, taxes, depreciation, and amortization)

Quarterly Reports

You can do a number of these reports on a quarterly basis, whether calendar quarters or a rolling 3-month report.

But the most important quarterly report you can generate is a simple 1-2 page "Quarterly Report" to deliver to your company at a meeting. This report is more of a narrative to let them know how you're doing, what's working, the challenges you face, and where you want to go in the quarter ahead. Here's the kind of thing you might include:

- Overview. For each of the major goals for the quarter, how did you do? Report on employees hired and departed.

- Profitability. Are sales up, down, or even? Are they on target? Is profit up, down, or even. Is it on target?

- Major goals for the new Quarter.

- A reminder or two about the vision and mission of your company. Tie these into the quarterly goals and activities.

- If you have written 1-year and 5-year goals, how are you progressing? How will the actions of the next quarter affect that?

Annual Reports

Annual reports are another thing. There's an old maxim that you have to start acting like the company you want to be. I've seen clients who will never be publicly traded, but they acted as if they were because they wanted to grow their companies significantly, and big companies make annual reports to their shareholders.

An annual report is a combination of all of these. It presents the finances with a little deeper analysis. It also presents a discussion of the goals and vision/mission with a deeper analysis. You might not write out your annual report for your employees, but you should absolutely go over it with all stockholders (including your spouse) and managers.

The end of the year/beginning of the New Year is an "obvious" time to get started on these reports. But there's never a bad time.

Of course i recommend a binder with tabs. Once you have someone to help with your finances, you can just show them how to run the reports you want and put them in the binder for you. That way all you have to do is review the information.

Sole Proprietor? To be honest, generating all these reports yourself is a GREAT exercise in understanding how money flows in, through, and out of your company.

As always, you need to find a system that works for you. But you should put significant emphasis on the financial side of your business. Remember two key lessons. First,

You will get better at whatever you put your attention on. (Palachuk)


What gets measured gets done. (Peter Drucker)

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On related cash flow topics, see SOP Friday: Cash Flow: Dealing with Late Payments and SOP Friday: Cash Flow: Getting Paid in Advance.

Related Articles:

- End of Year Finances - Pt 1

- End of Year Finances - Pt 2

Your Comments Welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at

- - - - -

Next week's topic: Activating and Registering Client Software and Hardware


The Best I.T. Service Delivery BOOK EVER!

by Erick Simpson

- Deliverables - Pricing and Positioning - Staffing Requirements -
- Hiring, Managing and Training - Technical Roles and Responsibilities -
- Processes and Procedures - Target Markets - Customer satisfaction and Loyalty -

and More!

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