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:
- 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.
- 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.
June 10, 2009
Effective project cost accounting ties directly into cash-flow management – 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.
Managing cash-flow requires the proper mindset:
- Think of your business as a collection of projects, each with their own cash flow – rather than just a pool of developers that must stay busy and get paid by the end of the month. A more granular view will give you more visibility and more control over the cash flow required to operate the business.
- Also, have the discipline to manage cash, even when it is not a problem. Doing so, will not only give you the tools when cash is tight, but it might just improve your cash position (so that doesn’t happen).
Critical to effective cash management is the ability to forecast cash-flow based on current and future requirements. Alliance Partners should have a 3 month forecast of pending payments versus expenditures. This forecast should be reviewed regularly – at least monthly, ideally weekly.
There are a number of ways to improve your cash flow.
- First and foremost, getting down payments to secure the materials (and labor) to commence a project. Agreeing to milestones for additional payments is also common practices. Your customer should not expect you to finance the project – unless they are willing to pay for the cost of that money.
- Moving your customers from 90 to 30 days can also improve your cash flow – by reducing the amount of time that you have to ‘float’ the project. If that’s not possible, you can at least establish the aforementioned billing/escalation process to ensure that they meet the agreed terms.
- Then, of course, you can also look at extending the terms with your vendors. Just not NI. 😉