In Part 1, we talked about how to start coming up with a realistic look at 2010 by looking at your continual or flow work. In this part, let's take a look at the next part of the business that you have built, the backlog. Over the course of the year, you have been bidding and hopefully winning work, not all of which will be completed by the end of the year and that amount that you take over into next year is your starting backlog. So we need to project that work across months to understand when the manpower and the revenue will actually happen. If you have a good Cost to Complete process, this should be part of your monthly process and the numbers may be right at your finger tips, if not let me see if I can help.
Breaking Down the Backlog
The first step to understanding your backlog is to break it down into easy categories. Some of us have accounting systems with cost accounting codes which makes this step easy. For future projections you can utilize the cost accounting codes (branch rough-in, trim, fixtures, etc) or a simpler method is to lump it into three categories: Major Equipment, Major Subcontractors, and Material/Labor/Other. I am not saying that combining is the way to go for every job or company, but in my experience this breakdown provides a good approximation without getting too burdened by all of the details of hundreds of lines. The most common error that I see in doing projections is that people want to be dead on accurate and spend months projecting, in lieu of realizing that it is an estimate and coming up with a good approximation. Don't get bogged down into doing a projection for days/weeks, it doesn't provide that level of value to your business to your business.
Major Equipment
For each job, I list the major equipment and the amount yet ordered or paid. It is relatively easy to approximate the month that the invoices for that equipment will come in and plug that into a spreadsheet. I always try and keep each item separate (gear, lighting, air handlers, etc) as they all have different shipping patterns. Remember with equipment and a cost-to-complete accounting method that you earn the revenue when you receive the invoice and not when the equipment ships or is installed and this projection should look at the invoice date.
Major Subcontractors
I treat major subcontractors and other major costs (i.e. bond payments) the same as Major Equipment. By listing them separately I can easily project the billing amounts across the months and will have something to check in future months if my projection is off from what I anticipated. It is not bad to ask you major subcontractors to give you an anticipated billing schedule, which is a great method if you have projects where they account for a majority of the revenue as a missed number there will directly affect your bottom line.
Material/Labor/Other
I know that combining this into one lump item probably has the most accurate amongst us cringing at the lack of accuracy that I am about to inject into the process. If you have only a few jobs, or ones with non-standard scheduling, this may not be the best method; but with several projects this method is relatively accurate. Once you have a total amount that you are going to spend on material and labor, I just approximate the manpower required per month to complete the project and project them per month. So the question is how do you convert manpower into a cost number? Each month has about 173 working hours so it is easy to convert the men needed into man-hours. Since I know from my cost to complete the number of hours to complete the project, I can easily calculate a material/labor/other dollars per man-hour number. For example if I have 2,000 man-hours left to complete the project and to purchase the general material, man-lifts, pay taxes, pay labor, etc, I will spend $100,000 then my cost per man-hour is $50.00. Thus as I project out the man-hours for each month, the cost will be the hours multiplied by $50.00.
Summary
An important point to note in all of these calculations as they are based on cost to complete and not on the revenue, thus they do not include any margin! This is critical to understand as you do not want to mix your numbers as it will not provide good clarity and will actually create errors. Once you have completed the above for each job, it is an easy calculation to figure out the revenue earnings for each job since you know the amount of revenue not earned to date. For this number, remember this is not how much you have not billed, but is the amount that you have not earned through 2009. This is a critical point also and if you have questions about this, either email me or ask your accountant for guidance.
Once you have each job, you can total them up and we are now complete with the Flow and Backlog portions of your 2010 and now we are on to the work we don't have contracts for which will be explained in future postings. For now, good luck and go win more work prior to the end of the year so you can build that backlog number as big as possible!
Breaking Down the Backlog
The first step to understanding your backlog is to break it down into easy categories. Some of us have accounting systems with cost accounting codes which makes this step easy. For future projections you can utilize the cost accounting codes (branch rough-in, trim, fixtures, etc) or a simpler method is to lump it into three categories: Major Equipment, Major Subcontractors, and Material/Labor/Other. I am not saying that combining is the way to go for every job or company, but in my experience this breakdown provides a good approximation without getting too burdened by all of the details of hundreds of lines. The most common error that I see in doing projections is that people want to be dead on accurate and spend months projecting, in lieu of realizing that it is an estimate and coming up with a good approximation. Don't get bogged down into doing a projection for days/weeks, it doesn't provide that level of value to your business to your business.
Major Equipment
For each job, I list the major equipment and the amount yet ordered or paid. It is relatively easy to approximate the month that the invoices for that equipment will come in and plug that into a spreadsheet. I always try and keep each item separate (gear, lighting, air handlers, etc) as they all have different shipping patterns. Remember with equipment and a cost-to-complete accounting method that you earn the revenue when you receive the invoice and not when the equipment ships or is installed and this projection should look at the invoice date.
Major Subcontractors
I treat major subcontractors and other major costs (i.e. bond payments) the same as Major Equipment. By listing them separately I can easily project the billing amounts across the months and will have something to check in future months if my projection is off from what I anticipated. It is not bad to ask you major subcontractors to give you an anticipated billing schedule, which is a great method if you have projects where they account for a majority of the revenue as a missed number there will directly affect your bottom line.
Material/Labor/Other
I know that combining this into one lump item probably has the most accurate amongst us cringing at the lack of accuracy that I am about to inject into the process. If you have only a few jobs, or ones with non-standard scheduling, this may not be the best method; but with several projects this method is relatively accurate. Once you have a total amount that you are going to spend on material and labor, I just approximate the manpower required per month to complete the project and project them per month. So the question is how do you convert manpower into a cost number? Each month has about 173 working hours so it is easy to convert the men needed into man-hours. Since I know from my cost to complete the number of hours to complete the project, I can easily calculate a material/labor/other dollars per man-hour number. For example if I have 2,000 man-hours left to complete the project and to purchase the general material, man-lifts, pay taxes, pay labor, etc, I will spend $100,000 then my cost per man-hour is $50.00. Thus as I project out the man-hours for each month, the cost will be the hours multiplied by $50.00.
Summary
An important point to note in all of these calculations as they are based on cost to complete and not on the revenue, thus they do not include any margin! This is critical to understand as you do not want to mix your numbers as it will not provide good clarity and will actually create errors. Once you have completed the above for each job, it is an easy calculation to figure out the revenue earnings for each job since you know the amount of revenue not earned to date. For this number, remember this is not how much you have not billed, but is the amount that you have not earned through 2009. This is a critical point also and if you have questions about this, either email me or ask your accountant for guidance.
Once you have each job, you can total them up and we are now complete with the Flow and Backlog portions of your 2010 and now we are on to the work we don't have contracts for which will be explained in future postings. For now, good luck and go win more work prior to the end of the year so you can build that backlog number as big as possible!