about the division’s goals or the department’s strategies. It
requires you to talk to the CEO about his or her vision.
Now, you’re talking about the larger goals and direction of the
business with management throughout the company. You’re
thinking about the future rather than just the past. You begin
to piece together a much clearer picture of where the company wants to go. Your understanding of the company grows.
You’re thinking more like a CEO, and the leadership team
begins to notice.
Phase 2 – Define What Is Likely to Happen
As you formulate the forecast assumptions, you must link
the goals and strategies of the business to what you think is
likely to happen financially. The intersection of the company’s goals and strategies and your conclusions about what’s
actually going to happen is fascinating. You have to forecast
profitability, cash flow, and financial position. You’re not
forecasting what someone wishes would happen, but rather
what you believe will most likely happen based on your
understanding of the business.
Let’s say your company is a commercial GC and one of management’s goals is to increase gross margin from 13% to 18%.
You look at the work-in-progress (WIP) schedule, and 18% is a
huge stretch based on existing projects. You talk with the CEO
and others on the management team about the details behind
the strategy to increase gross margin to 18%. Is the company
planning to bid on different types of projects? Is it increasing
prices? Will the company reduce subcontractor costs?
These types of discussions will help to adjust either the goal
or the action plans necessary to turn the improvement goals
into financial reality. Regardless, you will have led a forward-looking discussion with management that creates value for
them and the company.
Phase 3 – Turn Numbers into Insight
Now that you have the forecast up and running, it’s time to
turn those numbers into insight for management. The challenge is that now you have twice as many numbers to present – a full set of financial statements for the coming months
plus the historical financial statements.
So, think strategically; put yourself in management’s shoes.
What do they think about every day? How can you distill
the essence of your financial information into something
that’s simple and easy for them to understand and digest?
The information you provide should be viewed as an integral
The key here is to simplify, simplify, simplify, and then simplify some more. Consider summarizing the top 3-5 insights
when you distribute the historical and forecast results. And,
highlight the key drivers of performance so it clearly shows if
the actual results are not aligned with the expected results.
That way, management can quickly see the link between
their areas of responsibility and the impact their actions have
on the financial statements.
The sample memo below is an example of an insight (a focus
area) that might be included in what you send to management. Based on the prior example of a target to increase
gross margins from 13% to 18%, this memo would go with
the monthly financial reporting package.
Although the financial reporting package would include all
the financial statement details for management to eventually
realize the gross margin target was in trouble, the summary
simplified and summarized it, and made it action-oriented as
well as easy to understand. Sometimes it only takes a couple
of paragraphs to turn financial information into insight.
THE GROSS MARGIN TARGET
The table below provides a summary view of gross margins
on projects from last year as well as several recent projects and
The gross margin target/goal for the current year is 18%. This
table shows we are making some progress in increasing gross
margins from last year. The challenge we may face is the most
recently awarded projects and the bids outstanding suggest we
may fall short of hitting our target of 18% this year.
Let’s include this on our agenda for next week’s financial review
so we can talk in more detail about whether the gross margin
target of 18% for this year is in jeopardy or whether there are
steps we can take to increase margins faster.
Overall margin on projects from last year ( 36 projects) 13.3%
Three highest project margins from last year 18.6%
Margin on the two most recently awarded projects 14.8%
Margin on bids currently outstanding ( 10 projects) 15.5%