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Five Metrics that can help Maximize Revenue, Margin and Cash Flow Potential from Existing Business

Five Metrics that can help Maximize Revenue, Margin and Cash Flow Potential from Existing Business

For a business or sales manager, the last week of the quarter is a very stressful time. Push for that last-minute sale, run after the documentation for sales orders and contracts, and make sure that all the steps in the book to bill process happen smoothly – it is a race against time. The scope and degree of these activities may vary from company to company based on the setting of quarterly or annual targets but the end objective is usually the same – maximize the revenue, margin and cash flow potential. Cash is always king and any additional revenue is generally welcome, as long as the bottom line targets are met. But extra revenue, margin and cash flow that can be uncovered and pulled out of existing fixed costs is very valuable because it tends to flow straight through to the bottom line. This is where business operations can play a critical role in identifying sources, plugging gaps and putting in place processes to prevent revenue and cash flow leakage that leads to financial under-performance.

Given the timing, today’s blog post is focused on the metrics and areas that act as indicators to these quarterly business objectives. I have been called a “gold-digger” and a “revenue shark” by my bosses (and I take that as a huge compliment :)) and so here are five of my secret sources that help me uncover hidden treasures and meet the stretched targets specifically in the services business:

Metric #1 – Unbilled Revenue:

What:  Revenue that has been recognized in previous months/quarters but has not been billed to the customer.

Why:  Mainly due to

a)    Lack of confirmation/approval  on milestones in Fixed Price projects from customer on billing

b)    Lack of confirmation/Approval from customer on time sheets in T & M projects

c)    Milestones not in sync with efforts in Fixed price projects – we are burning efforts faster than we bill

Impact: Cash Flow (Collections/DSO) Target


Metric #2 – Unearned Revenue

What: Revenue that has been invoiced to the customer but not earned, accrued or recognized.

Why: Mainly due to

a)      Advance billing in Fixed Price projects based on a milestone such as Contract Sign off/PO received/etc

b)      Lack of Information on man months spent for the revenue in the project

c)       Milestones not in sync with efforts in Fixed Price projects – we are billing the customer faster than we are spending the efforts

d)      Man-months and/or Total project value for the project not updated or re-baselined in case of fixed price projects where revenue is calculated on the basis of percentage completion – we thought we would be spending x no. of man-months at project start but actually need lesser amount of man-months to complete the project OR the total project value has changed (+/- CRs) and man-months has not been updated

Impact: Revenue and Margin Targets

Metric #3 – Deferred or Unrecognized Revenue

What: Revenue for which we have spent efforts (tagged as billable) but has not been recognized or earned in the period in which efforts have been spent.

Why: Mainly due to

a)      Lack of documentation needed as per US GAAP or other accounting guidelines – no signed SOW/contract/PO

b)      Orders received but not reached finance or accounting folks

c)       Project not created/updated in financial systems

d)      Billing inputs not received by Finance in terms of how many man-months spent and where

Impact: Revenue, Margin and Cash Flow Targets

Metrics #4 – Resource Utilization Dips

What: Dips in Percentage of the actual revenue earned by assets against the potential revenue that could have earned.

Why: Mainly due to

a)      Real increase in buffer or bench

b)      “Hidden” resources in fixed price projects

c)       Missed billing for resources in T & M Projects

d)      Incorrect tagging or time tracking of resources

Impact: Revenue, Margin and Cash Flow Targets

Metric #5 – Static Backlog

What: No change in Difference amount (i.e. Backlog) of the Value Booked and the Value Billed/Recognized of an Order over a period of time. A healthy backlog is a good sign but it has to be serviced quickly or the order may get cancelled and the backlog will disappear taking away the revenue potential with it.

Why: Mainly due to

a)      Slow ramp-up of internal resources for T & M projects

b)      Delays in project schedule for fixed price projects due to skill unavailability, etc

c)       Delays in hiring

d)      Gaps in understanding of customer expectations

Impact: Revenue and Margin targets

Some of the terms above may seem purely financial in nature but business operations in service companies must look deeper into these numbers in order to discover and monitor the root causes of the variations. The variations in the above metrics are an indication of broken processes and work flows within the organization maybe due to lack of integrated systems or communication gaps or discipline. Fail to understand the significance of these metrics and you will fail to reap the benefits in the shape of maximized revenue, profits and cash flow that arise from the tracking and root cause corrections of these metrics.

I would love to know and learn from you. What terms or metrics do you use to monitor and improve the performance and efficiency of your organization? Where have you found revenue, margin or cash flow leakages in your work? Which of the above metrics would you want to know more about ?

Business Operations Performance Metrics: Cash Flow – Five Steps to Improve your DSO

Business Operations Performance Metrics: Cash Flow – Five Steps to Improve your DSO

Happiness is a positive cash flow ~ (Fred Adler – Venture capitalist) ~

Most of us in business or in sales have heard this – Revenue is vanity, Margin is sanity and …Cash is king. I have written about the importance of tracking cash flow related metrics in one of my earlier posts and now want to capture some of the “hows” behind the “whats”. A commonly known and accepted metric for measuring and tracking the cash flow situation in a company is the DSO* or Days Sales Outstanding. DSO is used to determine the effectiveness of the order to cash process of the organization as it depicts the average number of days it takes to collect an order and turn it into cash after a sale has been made. The lower the DSO number, the less time it takes to collect receivables and the better you are able to manage your short and long-term business needs.

While technology plays an important role to make your collections process as efficiently managed as possible, it is my firm belief that no technology can provide benefits the way it is meant to unless there is a clearly defined process and enough checkpoints in the system. Every stakeholder needs to know his/her role in the process and have access to the information necessary to focus on functioning in the most efficient way possible given that this process involves multiple functions (sales, billing, treasury, collections) or in the case of small businesses the same person wearing multiple hats.

Here are five simple steps that have worked for me in streamlining the order to cash process and improving the DSO metric:

Step # 1 – Start at the beginning: Before you make that sale, have you checked what payment terms are you agreeing to and what conditions need to be fulfilled to trigger the payment from the customer? This is where sales plays an important role.  When and how the payment will be received is as important as how much; and will save a lot of time for people downstream if sales negotiations take these too into consideration. For services contracts, payment milestones should be structured in a way that your spend is aligned and not more than the cash inflow at any point of time. Negotiate the best terms possible and make sure that the terms are clear to both you and the customer and are recorded.

Step # 2Update your records: Once the sale is made, whether you do it manually (through a simple Excel) or through a tool like SAP, record the important information in a tracker and set reminders. The minimum information should include the date when the invoice has to be raised, the date that it falls due, the supporting documents that are needed to get the customer approval on the invoice, who and where the invoice needs to be sent to, and the mode of payment. Review this information periodically and ensure that it is up to date.

Step # 3 – Communicate: Make sure that every stakeholder knows what is expected of him/her in advance so that people are not scrambling around after the invoice is due. For example, this could mean the delivery team knowing that there is a requirement for signed acceptance certificates for a product or time-sheets for a service, the treasury team knowing that a performance bond is needed for payments, the invoicing team to raise the invoice on the exact date that it can be raised and not waiting for the end of the month or the sales team knowing that a system record is required at the customer end. The idea is to be prepared so that you don’t lose days in processing time in raising the invoice and after the invoice has become due.

Step #4 – Follow-up, Follow-up and Follow-up: Ok, so if you have done the three steps above, the invoice will most likely be raised on time and  now comes the painful part which involves customer relationship management and possibly a little bit of tact and diplomacy (collections-speak for not being a pain in the you-know-what) and lots of perseverance. If you know who the person is, in the customer organization, who is responsible for the processing of your invoice, I have found it helps to touch base twice before the invoice becomes due so that you are paid on time without the need for umpteen delays and follow ups internally and to the customer. Once, before the invoice is raised, call the customer contact and confirm the process requirements at the customer end so that you raise the right invoice in the right way. And then, a second time after you have raised the invoice and before it is due, confirm that the invoice has been received and it is cleared for processing. This helps eliminate surprises and the need for follow-up after the payment is due.

Step #5 – Continuous Improvement: Metrics, Dashboards, Regular reviews and Continuous Improvements go hand in hand – I am a great believer of this. You may know what to measure and how to improve the metric but unless you include the mechanisms to maintain a sustained focus, things just slip eventually. So, maintain a dashboard that can track all of the items above and the connected metrics (Accounts Receivable buckets, Unbilled revenue, etc.), map that against the DSO trend, set up regular reviews to discuss what is working and what is not, celebrate the wins and work on what part of the process needs improvement. Keep the extended teams informed on the changes and their impact and make them a part of the success too to demonstrate the importance of cash flow management to the overall business.

What have I missed? What processes do you follow to manage DSO? How important do you think this metric is? I would love to learn from you.

 *DSO: The most common calculation: (Ending Total receivables/Revenue (or Billing) for the Period Analyzed) X Number of Days in period