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Data Drives Decision-Making

Author: Larry Chester

Every business owner looks for the information that they need to make the right decisions. Sometimes the information is not available, sometimes they don’t understand what data is needed to move the company forward. So often, information is just outside their reach, both practically and mentally. As a result, decisions are either not made, or made in a vacuum. In either case, the result can be expensive.

Bringing Value through CFO Insights

Computer systems and the software programs that run on them generate significant capabilities and information for businesses. Automation completes tasks in seconds that previously needed hours. The great secret to the proper use of an ERP system isn’t just the automation of mundane tasks, but the collection of data that wouldn’t normally be available or would take an inordinate amount of manpower to compile.

  • Business – Lease Abstraction and Administration
  • Location – Chicago
  • Sales – $5,000,000
  • Ownership – Single owner with a minority partner

Initial Contact –

The owner had purchased a Lease Abstraction and Management company several years earlier that was spun-off from a large real estate management firm. At that time, the company was profitable. Although sales have stayed constant over the past few years, profitability has shrunk significantly. With a change in accounting policies driving more business to his door, he needed to determine what happened to the profits they had become used to receiving.

Significant Findings and Recommendations:

Revenue Tracking and Billing

The company tracked orders in a number of spreadsheets with universal access. Proper billing was dependent on staff accurately color-coding specific cells while others identified what work was completed. By acting on the correctly colored cells, invoices could be generated. Missed invoices and double billing were not unusual in this environment. In addition, pulling together month-end data was done manually and wasted crucial staff time.

Recommendations

  • Confirm the information that the company needs for each invoice—including client detail, specific leases abstracted, employee or contractor working on the lease, expected completion date, and time spent.
  • Create a database for staff to enter each lease as it is accepted for abstracting and track the progress of the work done.
  • Establish a means for outside contractors to enter their work into the database remotely, eliminating time-consuming dual entry of data.
  • Create standard reports that would be used for billing, reporting project status to clients, open orders in house, expected revenue, etc. This eliminates the complex spreadsheets and provides data for the cash flow forecast.
  • Develop a tool to import information directly into QuickBooks, creating invoices on a timely basis. A simple report would provide a cross check of recently completed abstracts within the database to confirm the accuracy of the import.

Profitability

The company set targets for Gross Margin and Operating Margin, but the complexity of collecting detailed information (e.g., payroll, payroll taxes, PTO, medical insurance, and others) stalled the efforts to understand and rein in costs.

Recommendations

  • Create a standard cost for each labor type, rather than tracking those costs in such detail. Treat staff hours as inventory units and compare “standard” costs to actual costs monthly (eventually moving to a quarterly basis) and adjusting for variances. This would significantly simplify calculating profitability by client.
  • Use the data collected to measure direct labor hours for each abstract. This allows analysis of each abstract individually and by client as well.
  • Define what costs go into Gross Margin and Operating Margin. Determine which costs contribute to better decision-making. Gross Margin should include direct expenses relating to abstracting and labor costs. Expenses like management payroll, rent, and insurance are overhead and should be used in calculating Operating Margin, rather than being allocated to costs of abstracting.
  • Set specific targets for both Gross Margin and Operating Margin and track those monthly, using trend analysis to show improvement.

Planning

Lacking historical data on the number of abstractions, hours billed, and contractors/employees used, doing any planning was difficult. There was no budget for the current year, no cash flow forecast, and no KPIs or targets for key metrics of revenue and costs.

Recommendations

  • Determine the accuracy of financial statements for the prior year and use that until the new database provides accurate, provable data.
  • Set a target for revenue, labor costs, operating expenses, Gross Margin and Operating Margin for the next year. Include metrics that will be used when the database is completed.
  • Create a budget for the coming year. Use a modeling format, so certain key components can be modified, allowing results to ripple through the model. This will allow management to determine which factors have a greater impact on profitability, inside-versus-outside staff, small-versus-large clients, productivity increases on a per-abstract basis, etc. This knowledge will direct the efforts of management to drive profits to the bottom line.
  • Create a list of Key Performance Indicators (KPIs) that will help predict success in the coming year. Metrics such as number of abstracts, number of clients, type of leases to be abstracted, hours per abstract and average number of leases per client will help model profitability increases.
  • Develop a cash flow forecast to plan for cash needs for the next 13 weeks. Cash availability is always an important metric for any business owner.

Data should provide the basis for any decision-making in a company. An accurate set of financials provides information that allows a business owner to make important and necessary decisions. The key to true business management, though, is getting into the details. You can’t manage large numbers or combinations of activities. You need to get to the individual causation, the activities that are the heart of the transaction. To do that, you need more than just total revenue, total payroll, and/or total COGS.

At its heart, data accuracy is critical to the most basic function of any company—issuing an invoice. But data is used for far more than just invoicing. It is the root behind all decisions. If that data isn’t concise and actionable, the CEO or even the line manager is unable to make decisions that drive efficiency or effective use of material and staff—which are critical in bringing more money to the bottom line.

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