Knowing the true value of your workstreams will help you work smarter, not harder.
Benjamin Franklin wrote that “Nothing is certain except death and taxes”. Apparently, Mr Franklin didn’t know many business owners though because there is at least a third certainty, which is… Anyone who runs their own business – works hard. It is the reason I am so passionate about working with business owners. They are energetic, enthusiastic, visionary, innovative. They usually have more to lose and so have a relentless work ethic. Business owners and leaders are my kind of people. It is also why it pains me when I see business owners and leaders put their efforts into areas of their business which offer no value. Focusing on winning all the work possible or trying to grow too many different workstreams can be counterproductive. Work does not always equal profit. Knowing which workstreams offer the most value means getting the most reward for all that hard work.
Working Smart
I have worked with businesses who have immaculate accounting and cost control processes. They set budgets and profit targets for each workstream and extend their analysis down to individual jobs or projects. These businesses monitor revenue and costs almost hourly. They review the performance of their workstreams to determine how to make them more profitable, or when to abandon them altogether. These businesses generally have hoards of people employed to ONLY carry out this function which is essentially a form of risk management.
Conversely, I have worked with businesses who know next to nothing about their workstream profitability. If their P&L is in the black at the end of the year, they consider it a successful year. Whilst they might maintain an overview of the entire business’s performance, they pay little attention to which jobs, types of job or workstreams perform the best. This inevitably means that some work results in relatively little value.
This isn’t entirely surprising. Business owners often have a specialised skill set and millions of things on their to do list. This is certainly true of many Contractors in the building services and construction game. They may or may not have accounting assistance and this may extend to a dedicated accounts resource or may rely solely on an external Accountant or Bookkeeper. Workstream analysis is often not a priority. However, it is an important tool which allows business leaders to focus on the areas which offer them the most value. Working hard is pointless if you don’t work smart.
Where To Start
There really is a theme emerging when offering the fruits of my experience. As with many business solutions, you can choose a system, software or process that suits your needs regardless of your business set up. If you have capacity within your existing administration and accounting function, you can use existing accounting software to do much of the work for you. Most accounting software offers ‘project’ accounting as a standard feature or add-on. This usually just requires you to assign project or workstream codes to your revenue and costs within the system.
Alternatively, if you want a solution that is immediately accessible (or if you don’t have accounting software), an excel template might be sufficient for your needs. If you want a free example, get in touch.
Workstream Profitability Fundamentals
1. Identify Your Workstreams
This is not always as simple as it sounds. You might have a clear demarcation between planned maintenance, reactive call outs, small works and projects. Or you might want to look at the profitability of certain Clients, certain regions or certain functions or skill sets within your business. At the most granular level, you may want to see how each of your jobs or projects are performing. Depending on the level of detail you want, there will be differing levels of resource involved in capturing information. Regardless, a well-disciplined process does not need to be expensive.
2. Set Targets
Think about how profitable you would expect each workstream to be. A maintenance workstream may attract lower margins given the relatively low risk involved. Alternatively, the development of a new product may attract higher profit margins as it involves greater risk. Setting targets gets easier the more you do it, but having an expectation of the associated revenue and costs gives you something to measure against. It might also give you unexpected results!
3. Think About Resource
These days most businesses will use accounting software and have an accounts or administration resource which is responsible for dealing with revenue and costs. However, applying the information to workstreams may need additional or alternative resource. Often it is your business leaders, managers, even supervisors who are best placed to capture information and interpret it. It may require some discipline around itemising costs and a process for capturing information, but it does not need to be an onerous task and will involve your whole team in understanding where the most value lies.
4. Capture the Data
As mentioned, this may be as simple as assigning project codes in your existing software. However often not all costs are obvious or easily split amongst workstreams. The obvious associated revenue, direct material costs, direct labour costs, direct subcontractor costs etc. are easily captured. However, you may also need to consider the cost of indirect resources such as overhead staff, management, administration, office costs etc. How much of your business’s shared resource is being dedicated to certain workstreams? An estimated percentage is the easiest way to capture this or you can to split your resource into teams or carry out basic cost breakdowns.
5. Review the Results and Identify Trends
The more data you capture, the easier it is to identify trends. You may find that certain workstreams are consistent in their profitability whilst others are unpredictable. By compartmentalising workstreams you will gain a much clearer understanding of where your business is producing the most value and where the loss makers are. When you have a better understanding of this, you can focus all that hard work on the areas which return the most value.
Benjamin Franklin was right about one thing, “A penny saved, is a penny earned”.