Financial Management

March 30, 2010

Technical success as an Alliance Partner is great, but ultimately you need to be financially successful to run and grow a business. In the end, financial management is just as important as good project management. And, failure to do so is often the primary reason for the demise of a small services business.

Show Me the Money - Tom Cruise

So, you need to implement adequate processes to manage, control, report, and plan your finances. They may not need to all be automated, but there at least needs to be defined business practices to ensure that they are handled consistently.

We’ve talked about a couple of the most important in the past:

  1. Project Cost Accounting – a vital step in an integrator’s ability to maximize the profitability. As your business grows, it becomes impossible to run the business from macro-level – simply tracking overall receivables and payables versus the total labor cost. You must be able to account for your finances on a project-by-project basis.
  2. Managing Cash Flow – perhaps, the most important financial practice. This is particularly true for smaller system integration companies that often operate business that are fairly low-margin and a large payroll. You can actually have a profitable business with significant revenue, still run out of the cash required to operate the business. And, that’s not to mention the cash needed to finance the growth of the business.

Over the next few weeks, we touch on other basic financial practices required to run a successful system integration business.


Loss of Key Personnel (The Bus Problem)

March 23, 2010

OK, this is the last in my series of topics about taking necessary measures to protect you company against the loss – at least for now. Have you adequately protected yourself against the loss of key personnel?

I usually call this the ‘Bus Problem.’ What happens if you (or someone else in your organization) doesn’t look both ways as you cross the street, steps off the curb, and gets hit by a bus?

Loss of an Owner

Thoughts in this area usually begin with addressing ownership transition. What happens to the business if the owner’s heirs want to extract their value? You need to take adequate preparations to deal with this possibility. At a minimum, there should be an agreed method of valuation. Write it down and have it assigned by the owners.

You may also want to anticipate and create by-out contigencies. For instance, creating a life insurance policy where the company as the beneficiary, so the business could buy back the shares of the company so the heirs could extract the value.

Loss of Other Key Employees

In addition to the owners, you should also consider critical personnel. What if a key manager or technical expert is incapacitated? You may want to consider getting keyman insurance that would provide money for the company to replace and train an new person.

In some case, companies attempt to minimize this risk by cross-training employees. But, you may encounter objections from employees who want to ‘protect their turf.’ If so, you might appeal to them to help you help protect the company and their fellow employees against the potential risk of their incapacitation.

Oustsourcing to Reduce Risk

Some people consider subcontracting as a related matter. They use subcontracting as a risk mitigation strategy to reduce the chance of lay-offs. So, they plan to have 20-40% of their labor subcontracted. Particularly in light of the recent economic issues, it may seem like a prudent strategy.


Insurance Plans

March 16, 2010

As we continue our discussion about protecting your company against potential loss, we do need to talk about insurance. I know, I know – not very exciting. But, here are some major areas to consider:

Property Insurance

Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. Property is insured in two main ways – open perils and named perils. Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage-causing events as fire, lightning, explosion and theft.

Professional Liability

Most integrators carry some sort of general liability to insure their work. Liability insurance protects the assets of a business when it is sued for something it did (or didn’t do) to cause an injury or property damage. The amount of coverage a business needs depends on the perceived risk associated with their business. For example, a business that manufactures heavy machinery is at a greater risk of being sued than a company that manufactures linens, and would therefore need more liability insurance.

Errors and Omissions

By the way, if you do a lot of consulting work, you may also want to include Errors and Omissions insurance on the advice you give, or at least put language into your T&Cs that limit your liability (e.g. just recommendations based on information available at the time).

Workman’s Compensation

Workers’ compensation provides compensation medical care for employees who are injured in the course of employment. While plans differ between jurisdictions, provision can be made for weekly payments in place of wages and payment of medical expenses.

Misunderstood

Sitting down with an insurance broker is ultimately going to provide you with more answers than I can in this blog. But, I often here from Alliance Partners that getting insurance is often difficult because the agents often don’t understand our business. If so, you may want to look into the CSIA organization which offers its members insurance options specifically designed for system integrators.


Loss Protection

March 9, 2010

Last week, we talked about managing your computers systems including protection against viruses and loss of data. Continuing on that vein, let’s talk about other ways to protect against loss.

The Sledge Hammer Problem

People often consider obvious risks like fire or weather. (And, yes, you do need to have adequate insurance – more on that another time.) But, what about theft? Or, what if a disgruntled employee decided to harm your systems? A year or so ago, I was consulting with an Alliance Partner. When I asked about their network systems, he pointed to a rack in the corner of the room. I asked what they would do, if a disgruntled employee took a sledgehammer to the rack. As a good business owner, it may not seem very likely, but you’ve got to admit that it is leaving a lot to risk that could be easily protected.

Disaster Recovery Plan

Even if you feel like you’ve taken adequate measures to protect your business, you should still consider what you will do if disaster strikes. As difficult as it may be to imagine how you will rebuild your facilities and systems, the real loss is down-time, which could quickly destroy your business. So, ask yourself, if our building burned down tonight, how could we be billable tomorrow?

So, you should create a disaster recovery plan. At a minimum, it should address:

  • Direction and Control – basic plans and authority (e.g. buy computers, data recovery…)
  • Communication – how will you communicate with your employees, customers, vendors
  • Shutdown and evacuation – Might as well include a section on what employees should do if there is an on-site emergency

Finally, don’t forget to test it. Is the plan adequate, effective, and practical?

Adequate Protection

Providing adequate protection for you company is always a sticky subject. How much time and money should you invest to prevent something that has a minimal chance of happening? I’d suggest that has to balanced with how catastrophic is that risk.


Computer Systems Management

March 9, 2010

When you think about it, much of the intellectual property and technical assets of an integration company lies within your computer systems. So, it is critical to have a good management plan for your computer systems.

Data Protection

Most integrators are familiar with and have tools for providing adequate security. They are generally available tools for creating firewalls and virus protection. But, the amount of attention to data protection can greatly vary from one company to the next. It’s a bit surprising since that data is a huge asset for the organization. And, not just project data, but also business data, customer information, ….

Back Up Process

To adequate protect your company’s assets, you should have a formal, thorough, and complete process for data back up. On a daily basis, data from each computer should be backed up to a central server – preferably automatically. You should then back up the server. At a minimum, you should create daily tapes, store them in a fire-proof safe, and then take a copy off-site each week. Alternatively, many companies with multiple locations have begun mirroring their servers. (Consider working with another company to do the same)


Facilities and Equipment

March 2, 2010

OK, enough about organizational structure, what about physical structure? That is your facilities and equipment.

Facilities

Your facilities are a representation of who you are and the type of work that your company does. A professional workplace should be neat and ergonomic. The equipment should be available and well-maintained. Failure to do so may be a detriment to employee effectiveness and satisfaction.

It can re-inforce the image (either positive or negative) that you portray to your customers – or your vendors. Over the years, I’ve visited the facilities of many Alliance Partners. And, those that have well-kept facilities certainly instill more confidence that they will take the same care with their projects.

Computers and Networks

Computers and networks are the backbone of most successful companies. But, they are often an afterthought in a system integrators business – a part-time task that takes away from a developer’s billable time. If you haven’t already, consider defining the role of a system administrator. Give them the authority to create policies and processes for ensuring the proper equipment.

You should have formal procedures for purchasing and configuring computer equipment as well as installing and maintaining licenses. Employees should recognize that the computers are company property, not their personal computer.