Profitability

Don't Wait Until the End of the Game to Start Keeping Score

To know how your employer is doing you have to follow the money.
Don't Wait Until the End of the Game to Start Keeping Score
Image credit: Petra Rumanová / EyeEm | Getty Images
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I used to work at a writing mill, churning out page after page of promotional material on technical subjects. I was not, thank you very much, a “tech writer.” Business writers view tech writers as failed engineers or talentless hacks who are one economic downturn from working at Taco Bell. Tech writers, in turn, think business writers to be technological maladroits who could not pour water out of a boot if the instructions were not written on the bottom.

I was new to the job and eager to impress. I was designing a training program, and I asked the program managers how many hours had been billed to the project; he looked at me blankly and shrugged. He didn’t know. Not to be dissuaded, I went to the CFO who told me, "We don’t track that.” When I asked him how many hours they based the quote on, he was equally clueless.

Ask me no questions. 

So there I was working on a project without knowing how many total hours had been bid and how many of those had been used. Madness. By now self-conscious because I believed my questions sounded more accusatory than inquisitive, I gently inquired how in the living Hell the company knew whether or not it was making a profit. I was informed with withering condescension that we billed customers, and that was called gross revenue, and then we subtracted our costs, which revealed our net profit. Madness; all around me, madness.

Related: 12 Billing Mistakes That Make It Harder for Your Business to Get Paid

I grew to accept that loosey-goosey accounting method that they don’t teach you in accounting classes. There were no lofty terms like depreciation and debits, and no such pesky acronyms as FIFO and LIFO inventories. No, this was something easier and somehow more pure. Truthfully, it removed any and all accountability: I was absolutely at peace with it. Still, this company did eventually collapse, largely because of its amateurish cash-flow system, but I had abandoned ship long before.

There can't be two.

I had another job in a velvet sweatshop writing training. I was sure the first company was an outlier: there couldn’t be two companies that didn’t manage profit and labor on an individual basis. I was wrong.

I was again plunged headlong into a world of madness where nobody kept score until the game was over. This time the company only tracked overhead, code for: You useless fool! You aren’t working making money for the company. Here, to have over 10 percent overhead on your timesheet was to put a bullseye on your back, although everyone quickly learned how to game that system.

Related: 5 Steps to Cutting Overhead Safely

If you are an entrepreneur -- whether you are a sole proprietor or the owner of a medium- to large-sized company, you must know how much each project is costing you relative to how much you are billing for it.  This is easier than it seems, but there are some rules you should follow:

Spell out exactly what is billable and what is not.

In your quotes to prospective clients, detail what's billable. Is travel to and from the customer site billable? How about kickoff meetings? A clear understanding of exactly what constitutes billable activity is essential; what’s more, it avoids disputes over billing.

Share the quote with the team.

Too many business owners are paranoid about their billing; in their minds, they don’t dare share that information with their employees. They fear that if their employees knew the rate at which they were being billed to a client, they would demand a raise. If you fear that, explain to your employees the concepts of burden rate (how much it costs a business owner to actually employ a worker) and profit (the reason you’re in business). Most people will get it, and the conversation will end well -- except for ones where the employer is actively ripping off everyone in the equation. (You know who you are. So, in that case, you might want to fix that first, you greedy, dishonest pig.)

Don’t schedule mandatory nonbillable meetings and events.

Too many employers fill employees schdules with nonbillable meetings and then punish employees for being nonbillable. Now, assuming a 40-hour week (HA! LOL ... sorry, I couldn’t even type that with a straight face), an employer scheduling a daily, two-hour staff meeting instantly cuts employees' billable time by 20 percent. Think about that, but also know I’m being kind here. I have worked for companies that harp on people for the level of their overhead billing and yet routinely schedule 20 hours of nonbillable activities (meetings, training, employee birthday parties, etc.). This practice puts the employee in an intolerable dilemma: either he or she can cheat and bill the customer for that time, or the employee can log an extra 20 hours or so of work outside the workweek to retain a high, useful billability rating.

Related: When Expenses Are Really Investments

Keep good time sheets.

Everyone hates doing timesheets. Show me someone who enjoys doing timesheets and I will show you someone who probably eats food they find on the side walk (“Oooh, street pizza”). Good time keeping allows you to understand how much effort a project really takes; it differentiates between people who are good at their work and those who aren’t.

Learn from you failures.

Just because you lost money on a project doesn’t mean you’re workers failed to perform. When you lose money on a project ask yourself why? Was it scope creep (where the project slowly grows but the price stays the same)? Was it poorly quoted? Did you miss listing key assumptions that affected your ability to bill the project more? By knowing exactly why you lost (or for that matter, why made money), you can correct the error and do better next time.