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Nov 2011 - Vol 6, Issue 11
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Greetings,
Is it November already? The fast pace of the second half of the year seems to be a good sign. This month I have written an installment of my economic outlook for the industry. If I am any kind of bellwether, my bookings are up, planned further out, and expanding in scope.
Next week I will make my first appearance in Dallas, TX as an industry pundit on a public stage! Last chance to register for the R&S Software Summit and the R&S Roadshow. Read more below or register here.
Just a reminder to check out our training portal for AV Rental Technicians. If you need to evaluate these offerings for your company, email me for options on previewing courses.
This month's Best Practices column is about capacity-based business metrics. As always, thanks for reading and sharing with others!
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DALLAS EVENTS!
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 Software Summit
When: November 15th, 2011
Where: Dallas Market Hall
Learn More: LAST CHANCE for FREE registration!
This event is designed for owners and executives researching software solutions for their organizations. Admission fees apply, but send me an email to request your VIP code that allows you to register for FREE.
Who's exhibiting so far? Flex Rental Solutions, IntelliEvent, Navigator Systems, Unique Business Systems, Database Works, Point of Rental Systems, Production Exchange, Rental Point Software and more! Shouldn't you be exhibiting? Contact Adam Goldstein at 212-378-0465.
Rental & Staging Roadshow
When: November 16th, 2011
Where: Dallas Market Hall
Attendees will hear my keynote on 21st Century Sales: How to Untangle Your Old School Model in which I explain that your 1990 sales techniques stifle growth, reject great sales candidates, undermine project management, and dramatically cut into profits! - Tom Stimson
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| State of the Industry | 
Business Forecast for 2012
I know some of you are planning your budgets for next year, because I am being asked what I think the 2012 outlook is like. Between the world economic news, an irrational stock market, and an election year in the U.S., I can understand being cautious about 2012. I won't speak to the macro-economic situation but I can tell you what I think are significant trends.
- I am not hearing about any specific industry, channel, or segment that is in a downturn with the exception of K-12 markets.
- I am not hearing of any regions that are still depressed (other than the usual laggards), but I do hear about regional AV companies that are suffering. At the same time I often hear about AV companies that are thriving in the same region. (Not all problems are economic or regional.)
- The capital markets seem to be full of money looking for places to invest.
- Private equity is quietly moving again. M&A activity is up. Right now some private companies are selling because they can't fix their problems by themselves. Soon we should see good mergers showing up (a good merger is 1+1=3). The funding is there, but private equity either wants a bargain or home run.
- We have had a few major bankruptcies and I expect more. Why? Because companies with poor cash flow and unprofitable business models simply can't find any more financing.
- Margins generally remain down especially in the contract bid world where there seems to be no bottom. Some companies are buying revenue at negative returns. Why? I have no idea.
- Direct relationship selling is yielding improving margins, but much of this work is still being shopped around by the customer. Still, the smart money is on enterprise and relationship sales methods.
- Lead times are increasing on low-margin projects and shrinking on others (more time to shop for desperate contractors). Time to make short lead time projects more profitable!
If I were developing revenue budgets for 2012, I would lean towards the assumption of 6-10% growth even without any major initiatives. At the same time, I would increase the percentage of my expenses that are scalable. Procure more sub-contractors sooner rather than adding personnel to my business. If revenue growth exceeds 10%, then I might add personnel.
Net profits seem to have stabilized for most companies I talk to, so in 2012 I would strive to reduce overhead, improve efficiency, and turn away less than optimum projects in order to increase net profit by 2-3 basis points.
On capital budgets, I would invest heavily in anything that would reduce my labor costs over time. Software systems for project management and cost tracking fall into this category. Also, computer hardware prices are quite low. I would replace any computer over three years old and take advantage of faster, more reliable hardware and the latest OS version.
If 2011 was your sales growth and infrastructure investment year, then in 2012 I would focus on cost control and minimizing capital investments. Pay close attention to right-sizing personnel in 2012. Often I find that adding FTE's will reduce overall costs by spreading work around, reducing mistakes, and adding flexibility. By the same token, being overstaffed can be costly because it creates silos, which reduce flexibility and leads to mistakes. There is a correct headcount for every company, but it all depends on your business model, internal strengths, and state of your infrastructure.
I hope this adds something to your discussion. Happy planning!
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| Best Practices Series | 
Choosing Performance Metrics
What You Measure Will Affect What You Achieve
The bane of my existence is the misconception that all revenue is good and all expense is bad: this is what I call "straight line" finance. So I am always on the hunt for business metrics that show the relationship between good revenue and good expense decisions. Recently I heard about an airline business metric that triggered a lot of notes: Revenue per available seat mile. This one number succinctly captures how well the airline is selling its capacity and at what rate. If the airline sells an open seat at any price, then the ratio could increase. However, if that seat is sold for less than the same seat last month, the ratio goes down. Each route or time period can have its own target number. And each airline would have different outcomes depending on their cost structures. While this one metric alone is not enough to measure a business's success or failure, it at least tells a good story. Any airline can sell seats. The question is, did they sell them for enough money?
What is your company's equivalent of "revenue per available seat mile"? Here are some capacity ratios you might consider in pursuit of the perfect performance metric.
Capacity-Based Metrics Some aspect of your business revolves around available capacity. Metrics should also reference a specific time period. I prefer a trailing twelve months (ttm) average as a baseline to compare to the current period. When you learn what your ideal outcome is, you can apply that metric to potential projects and reject them before it's too late.
- Revenue per available rental income: Calculate the potential revenue of all your rent-able inventory (that is, rental items you actually receive revenue from as opposed to items that support other assets) and figure the 52-week rental income based upon weekly retail rates. If you divide that into actual discounted equipment revenue, you get a good measure of return based on what you think you should be getting (retail). What you hope to see is that the ratio improves in busy months (eg: discounts are lower). If your software is sophisticated enough, you can also compare projects, clients, or salespersons.
- Revenue to available installer hours: Most integrators would benefit from more outsourcing, but lack the metric that will trigger hiring of subs far enough in advance to be cost-effective. Add up all the billable hours your team could perform if they were scheduled efficiently. Go ahead and throw in ten hours of overtime per person per week. Divide that into the last twelve months' revenue for the ttm average. Compare this metric in profitable vs unprofitable periods to get an indication ideal capacity.
- Average margin per project day: This is a sophisticated calculation and only for rental or installation companies that have excellent work-in-progress (WIP) tracking and job costing systems. This metric goes down when there are cost overruns and up when mistakes are reduced. The nice thing about this number is that you can forecast it. If you prepare a fiscal budget each year, you have already predicted what you think this number will be - track it!
- Inventory on hand to revenue: In integration, the goal is to NOT have resale inventory on the shelf for too long. If things are ordered too soon or have to be restocked, this number goes up. If it goes too far down, then lack of inventory becomes a huge problem. Install teams will be held up, project days extended, and a host of other issues will follow. Inventory to revenue measures several key performance outcomes from finance to planning to execution.
- Revenue to any constrained resource: A process constraint is any widely-used resource that you run out of first - or soonest. Some companies track several of types resources because their primary constraint changes according to the revenue mix and season. For rental companies typical constraints are billable technical staff, project managers, trucks, inventory, or warehouse personnel. Integration companies have more processes and often are constrained in design, programming, CAD, project management, installation teams, or admin assistants. (Hint: if you are maxed in multiple areas, raise your expected margins before hiring more help!).
- Revenue per employee: This is an oldie but a goodie. Use full-time equivalent (FTE) counts to base your calculation. This includes your part-timers but not sub-contractors. Companies with better infrastructure and a culture of planning and process do better than those without. The point however is to find the staffing level that makes you most efficient and adjust to that number based on your forecast.
As you begin to understand what the numbers tell you, the point is to set new goals and change how you operate to achieve them. Never look at any one metric by itself. They are all connected! Trying to increase revenue per FTE may hurt your inventory to revenue by creating costly performance mistakes. And any metric in any period can be compared to ttm profit. Do you have a favorite metric to track in your business? Email me. |
| Closing Thoughts |  Here's a few scribbles from the margins:- Products are to Customers what Solutions are to Clients. If you want more Clients, create more solutions.
- Growth companies are proactive about hiring, infrastructure, and planning. They take calculated risks and invest for the future instead of reacting to the past. Are you sure you are ready to be a growth company?
- Once margins start to shrink in an industry, they will continue to do so. This is a signal that your product has matured to the point that customers expect you to find more efficiencies.
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About Thomas R. Stimson, MBA, CTS
Tom Stimson has thrived for over twenty-five years in the information communications technology industry. As a Consultant, Tom helps companies define their goals and then design a plan that will take them there. For more information visit the website.
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