The Virtual CFO

Requirement 6 for Successfully Implementing Construction Project Budgeting: Understanding of the Type of Work Your Firm Performs

This post is aimed primarily at construction financial managers. I’m giving owners and project managers a day off <grin>.

My first construction CFO job was for an underground utility firm. After a few moths on the job, the owner requested that I supervise an out of state project. We discussed what he needed me to do and I agreed to spend a day a week at the site monitoring the progress of the project. My visits were designed to help the owner manage the project without having to regularly visit the site himself. As time went by, I discovered that these visits helped me understand the type of work the company performed, which helped me in my role as the company’s financial manager.

I’ve never been involved in an overstaffed accounting department at a construction company. It is normal to have nine or ten hours of accounting and administrative work a day to accomplish. This is why it is easy for accountants to live in it their own world and not involve themselves with the activities in the field.

When I was a construction CFO, I required that the office staff visit a job site for one-half a day every month with a cooler of soft drinks (or coffee and hot chocolate during the winter). Doing this helped the staff understand the type of work the company performed as well as develop relationships with personnel in the field. It also helped the staff members understand the activities, materials, equipment, etc., that were involved in the work the firm performed. Every person I sent into the field told me that it helped them better understand the documents that crossed their desk. It also assisted in their ability to communication with project managers, superintendents, and field labor.

This is why I believe that financial managers need to understand the work their company performs in order to successfully implement construction project budgeting. This knowledge allows the financial manager to better understand what owners, executive managers, and project managers need for a budget to help improve the profitability of a project.

Factoring Receivables Internet Search – Is It The Economy?

In the last few weeks, the blog series I wrote on factoring receivables early last year has become extremely popular. I’m beginning to wonder if this phenomenon is a symptom of the current small business economic environment.

As many readers know, I regularly review the analytics for The Virtual CFO Blog. One of the statistics I like to look at is the blogs posts that have been viewed as a result of internet search engine searches. In the last thirty days, the following posts have received multiple hits as a result of internet searches:

• Factoring Receivables
• Advantages of Factoring Receivables
• Disadvantages of Factoring Receivables
• My Personal Experience with Factoring

Cash flow is the life blood of small businesses. This is why my second blog post and first blog series was entitled Happiness is a Positive Cash Flow. When the economy begins to slow down, small businesses experience two things. First, revenue begins to drop. Second, customers begin to pay slower than before. When this happens, cash flow begins to dry up and small businesses look for ways to speed up and increase their cash flow. Factoring receivables is one of the tools businesses have to accomplish this.

This is why I believe that the faltering economy is the reason that the factoring receivables posts have become so popular this year.

Requirement 5 for Successfully Implementing Construction Project Budgeting: Negotiating Skills

In the previous three posts in this series, I have discussed how owners, top management, project managers, and financial managers need to exercise people skills in order to successfully implement construction project budgeting. Closely related to the people skills are negotiating skills.

Merriam-Webster OnLine defines negotiate as "to arrange for or bring about through conference, discussion, and compromise" (http://www.m-w.com/dictionary/negotiate). As with people skills, the ability to negotiate enables those involved in the budgeting process to successfully navigate through any differences in wants or opinion that may arise during the process.

For instance, a financial manager may have developed a standardized way of reporting job progress and budget variances. A project manager at this company may want to track a certain segment of the budget in a different way than the standard budget. The reason for this is that the project manager can use this information to better manage his project. Through negotiation, the financial manager and the project manager can cut a deal that both are satisfied with.

We can use subcontracted paving as an example of negotiation. The standard budget reporting process may only report the paving expenses that have occurred on a project under an account entitled "subcontractor cost – paving". The project manager may want the paving expenses broken down by the different coats that the paving sub is under contract to install (i.e., gravel base, base cost, and top coat).

Through negotiations, the financial manager may not agree to change the standard budget reports just for one project, but may offer to produce a monthly and project-to-date report for the project manager that tracks the progress of the paving subcontractor based on the types of coats the paving subcontractor is under contract to provide.

The result of successful negotiation is that both sides win.

Requirement 4 for Successfully Implementing Construction Project Budgeting: People Skills – Financial Managers

I’ve been the CFO of two construction companies. At the first firm, the owner gave me the authority and support to be a strong financial manager. The owner of the second firm didn’t and I found that my job was more difficult as a result. This illustrates that the role the construction financial manager holds is largely defined by the authority and support the owner and top management give them.

However, at the second firm I was able to use my people skills to become friends with the project managers and I eventually earned their respect. Part of the process of earning their respect was showing them that the information I held could help them improve their personal bottom line. All of the project managers at this company were paid a base salary with a sizable bonus based on the net revenue of their projects. So they learned that it was in their best interest to work with me as I tracked their projects performance.

Another part of the respect gained was demonstrating I was neutral in my role and not an advocate for the owner. There was a large amount of friction between the project managers and the owner at this company. So keeping both the owner and the project managers satisfied was a people skills tightrope act, but the results were worth the effort.

Once I gained the project managers respect, I was able to implement most of the budget and budget related activities that were necessary to track the progress of jobs. Even so, I still found that the project managers held some of their activities, expenses, and plans close to the vest, which made it more difficult to accurately track the progress of the projects.

I believe that the construction financial managers’ role in a firm is largely defined by the owners and top management. But I also believe that the financial manager is responsible for using their people skills to work around, and within, their role.

Requirement 4 for Successfully Implementing Construction Project Budgeting: People Skills – Project Managers

In every company I have worked for, there are employees who are treated a little bit better than others. These are usually the employees who are responsible for bringing business into the company. I have worked in the logistics, software, and printing industries and I can attest that the sales staff receives privileges that other employees don’t.

After college, I began my professional career as a logistics salesman. So I’ve experienced first-hand this type of special treatment. I believe that producers in a company deserve special treatment. Without sales to customers, no one else would have a job.

In construction, the project managers are the ones who are treated a notch above other employees. The reason for this is that they bring the revenue into the company. They do this by bidding and winning projects and by managing the profitability of the projects. Without project managers, no one else at a construction company would have a job. This is why believe that project managers deserve the respect they receive.

However, many project managers feel that they have a complete handle on every aspect of their projects. This attitude makes them believe that they don’t need external input concerning the performance of their project. This is the prime reason that budgeting for construction projects fails.

Project managers must to be open objectively evaluating their project’s performance if construction project budgeting is going to be successful. The ability to do this involves the people skills of the project manager. They have to be able to work as a team with the owners, executive, and financial management of the firm.

I believe that the project manager needs to be the "buck stops here" person with respects to their project, but I also believe that they need to be open to constructive criticism from others who can help them run their projects more profitably.

Requirement 4 for Successfully Implementing Construction Project Budgeting: People Skills - Owners

If all you have is a hammer, everything looks like a nail.

This saying fits a lot of the construction company owners I have been associated with. But there is actually a reason why they manage their companies this way.

Practically all of the construction company owners I know started their career in construction as labor. Through hard work and talent, they worked their way into superintendent and project manager positions.

One of the most popular construction crew motivational tactics is to bully and intimidate the labor. An example of this would be threatening to fire an entire crew if they didn’t get a concrete foundation laid by the end of the day. There are times when you have to push a crew to get a job done on time and often this is the only tactic that works.

Unfortunately, this tactic often backfires when it is used with project managers. This is especially true when the project managers know what they are worth and their importance to the company. Generally, project managers know that the company makes money because of their ability to obtain and manage projects.

This is why it is important that construction company owners have the people skills necessary to sell the idea of project budgeting to project managers.

The ability to sell is different from cramming budgeting down the project managers throats and hoping that they get with the program. Additionally, using people skills to sell budgeting goes beyond the implementation stage and are vital as the budgets are actively used to improve profitability of the project and the firm. The owner has to work with the project managers as a team if budgeting is going to be successful.

A lack of people skills by the owner of a construction company can hinder or sabotage construction project budgeting at any time during the budgeting process. This is why construction company owners must have the people skills necessary to sell budgeting to project managers.

It’s Tax Seizure Time!!!

As a CPA, tax season is an important and busy time of the year and I’ve been preparing for this tax season since last fall. Over the last few months, my four-year-old daughter, Hannah, has heard me discuss with my wife and friends the tax season preparation I have been making.

As an infant, Hannah’s favorite sleep toy was a little stuffed lamb named "Lambie Pie". Over the last three years, Lambie Pie has evolved from being her favorite sleep toy to being her best friend. The rules are that Lambie Pie is just for sleeping, but we’ll often hear Lambie Pie’s little rattle during the day when Hannah takes Lambie Pie out to play.

Hannah started pre-k last fall and she has been taking Lambie Pie to school for nap time. While visiting her class during the day, both my wife and I have seen Lambie Pie out and about during non-nap times. We’ve also learned that Lambie Pie has become a fixture in her pre-k room. Last October, a classmate of Hannah’s came to our house to play and the classmate had to say goodbye to Lambie Pie before she left with her mother.

During the Christmas break, my wife and Hannah discussed not taking Lambie Pie to school for nap time and Hannah agreed. So last Tuesday morning, Hannah returned to pre-k without Lambie Pie.

On Tuesday afternoon, Hannah returned home from school and came to see me in the office. She asked me how my day was and I told her that I had a good day and that Lambie Pie helped me around the office (Lambie Pie is not in school so she has to get a job). Hannah asked me what kind of work Lambie Pie did and I told her that she answered the phones and worked on the computer.

Hannah then looked up at me and said, "Is Lambie Pie going to have a tax seizure too". It took me a second to realize Hannah mistook "season" for "seizure".

But I quickly realized that tax season has been known to cause tax seizures in its participants. For example, this morning we’ve been working on quarterly estimated tax returns for clients and I just looked over and saw that Lambie Pie has had her first tax seizure of this tax season.

Requirement 3 for Successfully Implementing Construction Project Budgeting: Authority to Take or Suggest Corrective Action When Needed

Whether you are a construction company owner, manager, or financial manager, you have to have the authority to take or suggest corrective action when needed if construction budgeting is going to be successfully implemented. When I say "suggest" I mean the authority to make suggestions that will be either followed or seriously discussed when made. This is a level of suggestion that is well above "throwing it against the wall" in a meeting or discussion.

First, I need to define authority. In this case, authority means the ability to make decisions and have the organization support the decisions you make.

I have been the CFO of two construction companies. At one of these companies, I was actively involved in the management of the firm and the owner let it be known that he supported the decisions I made and that I represented him when he was not around or available. At this firm, I had the authority to make suggestions that would be seriously listened to. At the other company, the project managers essentially ran their own business under the umbrella of the company and they received little direction from the owner of the firm (there was no executive management at this company). In this environment, my authority to make suggestions that would be followed was limited because the culture of the organization.

Secondly, I need to discuss the ability to take or suggest corrective action.

Budget variance reporting is one of the vital elements of the budgeting process. Budget variance reports help you determine what aspects of a project are progressing well and which are not. This is why those involved in project budgeting must be able to use variance reports to make suggestions that will help improve the performance of the project.

At the first company discussed above, I worked closely with the project managers, helping them monitor the performance of their projects. At the second firm, the monthly budget variance reports were discussed briefly but never used as a tool to improve project profitability.

The Virtual CFO Meets Law on the Row

Yesterday morning, I had the opportunity to meet attorney Barry Shrum from the Law on the Row blog. Barry and I were introduced through a mutual client and we spent time discussing how blogging was an asset to our practices.

Barry’s blog covers the gambit of music related legal information. One of his most interesting posts was "The Magic Bubble Bursts: Did the Record Labels make their own grave?" In this post Barry wrote:

"For almost a decade now, the major labels (at the beginning there were five of them, now only four, EMI, Sony BMG, Vivendi Universal and Warner) have declared that illegal downloading is ravaging their business by destroying the sales of physical product. One may question this declaration, however, in few of the fact that ever since the RIAA filed its 1998 litigation again the manufacturer of the Diamond Rio MP3 player and extending to its most recent lawsuits against individuals across the country, the music industry has committed more public image faux pas than Dan Quayle and George W combined, making it one of the most hated industries among high school and college students. It should be apparent to everyone now that it is not illegal downloads that is causing the downturn in music sales, as there are many other contributing factors, including the negative image the RIAA is generating."

I know that I have readers and clients who are involved in the music industry, so I encourage you to visit Barry’s blog for music industry legal information.

Happy New Year!

I hope that you had a happy and safe new year.

I'm going to enjoy some football and having a day off.