Challenge your accountant
Start tracking the work time
Integrate the data into one datastore
Start defining your KPIs
Automate the reports with some simple tool
Take it with you
The current situation with the virus breakout is affecting business differently. It is clear that there will be troubling times in economics. My company has been in business more than 19 years and I went through the previous economic regression in 2008. I decided to give some hands-on ideas how to be prepared and have data available for hard decisions.
When I started working with my team, most of our attention went into finding the right people and clients. It makes sense, as ultimately it's growth you need in the early days. You need to grow out from that freelancer mode of having the few first people on board. The same goes for the clients. Even though we had a great cooperation with a globally successful client, we always knew that we are way too dependant on them. But once you grow and are not able to micromanage every aspect of your business, things start to get complicated. This starts usually earlier than you predict.
In our case, the business of product design and development, we are working with a relatively inflexible resource – people. You cannot buy them in for one week and let them go next one. But your clients expect you to help them fast. And when the client leaves or the virus makes your retail clients close the shop – you need some hard decisions to make.
In a normal situation you can sell as much as you can and hope that the growth will save your ass. Or you could be prepared and start collecting some KPIs that will tell you which parts of the business needs improvement, which project is profitable and which is not. If you are in the similar business as we are, the following examples are probably not new to you:
But after years of failing and trying, I believe we have become better when it comes to numbers. Looking back now, I believe it is possible to do it faster. Hopefully, this article will help you save some time.
When it comes to accounting, there is something that has always bothered me. It is the fact that even though the balance sheet of the company and your income statement should describe the company accurately, it is rarely used as a monthly tool for business management in small companies. In my opinion, the system itself has created so many strict rules that at some point it started to drift away to the wrong direction. So the accountant, instead of being the source of information to business manager, started to be a tool for the tax department only. You should not pay for it, the government should, right?
Luckily we have an accounting team that has been with us for many years. They have been with us in multiple spin-offs and start-ups we have created. That allowed me to go to them and ask them to fix three things:
I can tell you that they are not willing to do it in the beginning, but once you get them to understand your purpose, it will be smooth. Let me explain these actions with a few examples:
First, the records in income statement – let's take the salary cost, which is the biggest input cost for us. Usually we will find the salaries all combined onto one cost article along with the taxes. But in order to do business decisions you need to know if the salary is directly related to the projects or products you are doing, or is it indirect – like marketing. As they are manageable in different times and levels, they need to be separated.
Second – invoices for large fixed agreements might go out at the end of the project, or before the project. In order to know if the project was making loss and in which month the issues raised, we introduced the aligned date in our accounting software, where costs are shared to period of value creation. This gives us month-to-month view on the dynamics of the project profitability.
For the last example: get your incoming costs attached to the project. It is important that when you buy something specifically to support one or two projects, the costs land in direct costs related to the client account and the project.
As I said before – in the IT and design world at least, your biggest asset is the team. It is also most expensive and least flexible asset you could have. Your decisions are not immediate and sometimes not even actionable. So you want to generate as much data as possible about that. You need to know exactly who and how much worked on what.
There are some tools that can help you with that. We are using a plugin in Jira called Tempo. It isn’t the most simple tool to use and for the beginners I’d recommend something like Toggl or even develop your own simple in-house web page to collect that information. We had our own internal system for years in the beginning. The reason why we changed it, was the integration to the software backlog – we wanted to integrate this not just to management accounting but also to software project planning and sprints.
Now it gets technical and usually you need technical skills for this. Datasources I have integrated with have been Google sheets, Toggl work time recording tools, Jira Tempo work logs, POS systems, accounting software. Some of them require coding skills to transform the data, some I’ve been able to integrate with by just configuring pre-made service for it.
The process is called ETL (extract, transform and load) and if you cannot use tools like Stitch Data, you might want to hire somebody to do that, or hack together yourself. As we have the skills in-house, it was easy for us to start building these scripts.
The basic idea behind the process is that you bring all relevant data to a database that you can later use for your analyses. We use Google BigQuery service to aggregate the data together.
As you now have the data collection, which is also aggregated, you have enabled yourself a way to start measuring whatever you want. It is difficult to say what KPIs are relevant to your specific business model and team set-up. We have defined company level financial KPIs and this is also easy place to start. In addition to revenue & EBITDA, we also measure gross profit. That is the profit after direct costs and before indirect costs. That metric is relevant to product managers and important short-term indicator how we are doing. But what makes it good is that it can be affected also relatively quickly.
In the situation as we find ourselves today, we have added some KPIs to handle the cash flow. So now we also follow some data that describes our cash runway:
And we also follow some KPI-s which give us an idea how much we use the power in our engine:
We are using Google Data Studio, but there are probably many similar ones. Some are more expensive and more complicated than others. Google Data Studio works well for us because that way, we can actually use Google’s other resources to data migration, automation, etc.
Don’t buy the most expensive tool and hope that it will do the job for you. Be sure you know yourself or have somebody in the team who knows the basics of SQL and data management.
The whole idea of building the data visualisation tool was to use it when you need it. I have been in the mobile applications business for a long time, and our team has built a number of data dashboards relevant to many B2B services. So I’ve used that experience and designed most relevant numbers to myself in a way that I can access them from my mobile device.
What information I need on mobile? Mostly the one that helps me in short-term decisions. For we’ve helped a bar to have a mobile daily report on how last night went. So you can act quickly and revise plans for the next day.
Having good BI data is not simple and cheap for sure. But if you can hack together a good IT product or service, you can put together relevant data as well.
I am happy to help any company to achieve step 4 and 5, but you need to take your own steps. It is probably a topic that we could all write books about. If you want to share your own experience, or you think I can help you out, let me know.