SIGN #5 – Is This Going On In Your Business Partnership? Reporting
… What you don’t know about early enough you can’t fix. Reporting problems come in two forms, financial and in the moment. Getting the content right and using reporting calms partner pain.
In this series of blog posts, we’ll present each of the signs and what to do if you’ve got this partnership pain. Make sure you read all the blog posts in the series… you may have more than one.
Why bother to consider re-committing to your business partner? In a 2008 study of US Companies by the Small Business Administration, companies run by partners beat sole proprietors hands down… Over 30 years, partnership revenue went up by 157% over 30 years. Sole proprietors lost 7% year over year.
Keep reading to know if you’ve got the pain, and most importantly, watch this free video training that shows you how to get back in the driver’s seat with your business partner… then you can figure out if it’s worth it to re-commit with the right rocket fuel in place… or divorce without blowing up your business investment.
Sign #5 Reporting
One of the most spectacular times of year for miscommunication between partners is when the financial statements arrive, revealing how much the company actually made last year… and what your share will be of the dividend pool.
If you have financial acumen and a patient accountant, maybe you’ll understand the income statement and why the number at the bottom is smaller than you were hoping for.
If an income statement is a mystery to you and a familiar language to your partner, doubts creep into the conversation. It doesn’t make sense, so you have to blame someone, right?
Missed expectations are a real firework starter between partners.
If the numbers just don’t add up in your mind, you’ve got more problems than how to read an income statement.
You have a reporting problem.
Financial statements only give you a look at past performance. They are not useful to prevent profitability problems from happening, while you still have a chance to save the bottom line.
When we work with business partners, we often discover that one partner is ‘in charge’ of the financial picture, and the other trusts that ‘all is well’ unless otherwise informed.
This lack of communication about what is going on is not due to one partner owning the financial domain. It has to do with whether you have the right tools to ‘see into’ your business.
In our books, there are five types of companies. Each need different reporting mechanisms to allow leaders to spot problems while they are happening so you can take recovery action. This is a small list of the types of financial report that helps you keep the profit you estimate.
- If you sell hours, you track how billable people are and how billable they will be expected to be.
- If you sell projects, you track the variance between the profit you estimated when you bid for the project and the actual profit as work progresses.
- If you sell products you make, you track the cost of goods sold to make sure what goes into production agrees with the budget allowed.
- If you sell products other companies make, then you track inventory turnover to make sure you carry what’s selling so you won’t be left with un-saleable merchandise.
- If you sell solutions, a combination of service hours and products, you have to track #1 and #3. If you bid for projects, you have to add #3 to your tracking system.
Each of these reports can be produced by your accounting software… as a first step. But you may need to build other systems like budgeting and forecasting into your company.
Then you’ll need to train people in how to access and use the reports so everyone knows what it means when you say “the variance has increased 1% on the last project“… and then can have an exploratory discussion to find the source of the problem… without turning the meeting into a showdown.
Nothing worse that doing all that work to churn out a report and then not knowing what to do with it, so it never gets looked at… or worse it’s used solely as a weapon to prove someone screwed up.
For instance, we work with many building industry companies. Some bid for projects, some make materials.
In most cases, partner pain evolves when the company that bids for projects discover that despite 10 major projects, they have little to show for their labors. No dividends this year.
Who is to blame in this situation?
Let’s break it down… by first removing the question “who is to blame?”
A construction company partnership we worked with, faced a systemic problem, that caused partner pain. No one person can take responsibility for it, therefore there is no sense in pointing fingers. In fact, pointing fingers disguises the root cause of the problem.
Let’s look at how such a conversation usually goes to prove the point.
We know from experience, that when there is a variance between estimated project profit and actual project profit, the problem lives in how much labor was used on the job.
We present this hypothesis to the partners.
The guy who runs projects says “no way, this is a material purchasing problem.”
The estimator’s arms cross. “Fat chance. I know the price of everything at the time of the estimate and we aren’t paying anymore now than when we priced this job.”
The ball goes back and forth:
- So did the problem of too much labor start with how the estimator priced the job?
- Was it caused by the superintendent not watching his people closely?
- How about change orders that never got approved?
- What about the project manager’s role in making sure the schedule was adhered to?
Asking these kinds of questions keeps the problem circulating through the system with no way out.
In fact, the atmosphere is so hostile, no one wants to talk about the problem any more. So they leave with their disappointment souring their faces.
The right questions to ask are to match who did what on a given day with what the estimator thought could be done. Then find the moment in time that the spiral out of control started. Of course the time sheet needs a bit more detail about what each worker spent time on to track back like this.
We can hazard an experienced guess that the beginning of this mess was a lack of information flow which required people to guess and make assumptions about what was to be done, who was to do it, when and why.
Checking in with each other is more than a one-way conversation. It’s another form of reporting, like the variance report.
In one client company, when the general contractor yelled at the superintendent (yelling was their culture at work) who worked for our client (who had a culture of not talking a lot), the super would get caught up in blame game.
Meanwhile, back on the job, material and tools are at a stand still. A journeyman is frustrated so he takes matters into his own hands and starts work on the next floor. Apprentices follow him silently and watch what he does, knowing better than to interrupt him. He’s got a sarcastic reputation. Then they try doing the work themselves. Pretty soon everyone is back at work … but is it the right part of the job at the right time doing it in the most cost effective way.
When the super gets back and compares what everyone is doing, with the schedule, he knows he’s behind. But if he doesn’t get the budget, all he can control is the time spent so far.
The project manager shows up, sees the effect of the day on the labor budget and everyone is yelling again. Meanwhile, work continues unabated… its just not the right work at the right time with the right guidance… so now time must be spent un-doing what was not done well… the blame is past on to the journeymen, who take their frustration out on the apprentices… and the profit slips away in a sea of unhappy, highly paid people.
People drive business performance.
To be able to do that well they need context: timely reporting about how to do something, how it fits into the big picture and what effect it will have on the next step or the previous step of the work… these discussions are needed everyday no matter what type of business you have from selling hours to solutions.
This kind of reporting has to happen in the moment so people have the context of the situation at hand to give it meaning… later it’s a battle to prove who can remember what and who’s perspective is correct.
Financial reporting has to happen on an as needed basis so the project manager and the superintendent can compare what they are doing with what they were scheduled to do… daily or weekly.
When our client discovered that their variance was growing every year, meaning they were steadily become more un-profitable the more jobs they took on and the bigger they got, there were a lot of partner fireworks … until we unraveled the sequence of events as described above, for them.
Business partnerships come with hidden risks you never see coming. Watch this free video training to discover where the risks are in your partnership, and what to do about them now, before they melt away your investment.
What kind of reporting makes your job easier? What information do you wish you had earlier so you could prevent profit leaks? Leave your comments below and we’ll respond.
Did you find out if you’ve got any of the other signs that contribute to partnership hassles and pain?