Technology

The Importance of Data Analytics in Finance

With improved financial management through analytics, construction companies will be positioned to survive the economic downturn and seize opportunities for expansion.
By Bassem Hamdy
October 22, 2020
Topics
Technology

Construction financial executives are vigilant managers of chaos and risk, but even the most trained and attuned face unexpected challenges that are born from the inherent complexity of their projects and from the clients and markets they serve. Jobsites can be suddenly suspended, short-term setbacks may threaten payrolls and labor shortages lead to compressed schedules—all while executives are frantically trying to understand how cash is moving into and out of the business.

When construction is hit with the economic uncertainty as instigated by COVID-19, cash isn’t just king, it’s the emperor. As markets swing and there are unprecedented disruptions to normal business operations, financial managers feel the incredible strain to keep projects in motion, to have labor working on the jobsite and to keep their backlogs filled. The lighthouse in this uncertainty is the ability to use advanced data analytics to better manage financials. When a company is able to masterfully forecast cash flow and execute on its strategic financial visions, it is empowered to serve its market and clients for decades to come.

Get Better Visibility into the Business

Executing on a financial strategy begins with having a fundamental understanding of the financial position that the company and projects are actually in. This means being able to answer questions with hard financial and operational data, not gut alone. How will the projects being pursued impact profitability and cash position? What is the actual margin on jobs? What is the variation of that margin over time? What margin can be expected with this type of work? These questions are not answered overnight and require serious manual time and effort to gain that visibility.

The ability to do this means that data must flow through the business seamlessly and information must be sourced quickly. Data should be sourced from every nook and corner of the business: Excel files, shared cloud drives such as Sharepoint or OneDrive, and historical data from legacy systems. This is not an easy task, but it must be done quickly and without spending precious time and overhead dollars, especially when employees are at their limits. Controllers and accountants are not supposed to be data entry clerks, nor should they be asked to build complex data science models to find patterns in the business.

Reporting Alone is Not Analytics

Often, contractors find themselves using reports and dashboards out of their accounting or project management system. While these dashboards help to provide a good snapshot of the business, these reporting tools do not solve the critical workflow automation and intelligence capabilities needed to understand the data.

As a mid-sized specialty contractor noted, “We have lots of reporting; there is no shortage of dashboards that can give us a snapshot of the business. What we lack is context. A true analytics platform helps us identify correlations and patterns in the data that humans cannot detect at scale. These insights allow us to catch issues earlier and give us a critical competitive advantage in our market.”

This is why investing in a data analytics platform is important: it automates the tedious workflows to handle and manipulate data, and it provides the intelligence and predictive component to understand where the company is going—not where it has been. A reporting tool is only a visualization of something that has already happened. Long-term financial success of any construction company is in how well it can anticipate what may happen on future jobs.

How well construction executives understand the state of their business today—and the level of detail that exists within—is a good representation for future performance of any contractor. Modern construction financial accounting and forecasting is essential to the performance and survival of companies in the ever-changing construction landscape.

Answering Tough Questions

The construction industry often feels like it is working on the Tower of Babel; everyone is speaking a different language and there’s no translation between departments. An essential element of improving company-wide financial understanding is to break down the language barrier between the finance team and the operations team. Typically, project managers don’t come from a finance or accounting background, yet somehow CFOs think that they can hand over a financial statement to someone in the field and they will understand what to do with it. This specialization bias goes both ways.

Instead of brute force, there needs to be harmony between departments and a meeting ground where financial managers can speak the language of operations and vice versa. That often means learning to talk in pictures by presenting dashboards and charts, but since the beginning of construction every executive has been on the ‘Project Health Dashboard’ scavenger hunt. Unfortunately, it’s been a mission without a cause. Charts and dashboards are time consuming and labor intensive. And construction leaders need to focus on construction, NOT data science. They don’t need the ability of data science; rather, they need the ability to form a question. That should be enough to get a fast, hyper-accurate, predictive answer.

Ask the Right Questions

Cash is the most important line in a financial statement, but cash flow problems are often a symptom of other operational or marketing failures. Adopting good data analytics is the first step in addressing those operational bottlenecks and improving cash management.

Clear communication between the CFO, operations and subcontractors pushes all departments to spend more time thinking about the cash cycle and where cash may be tied up unproductively in things such as overhead, materials and mismanaged projects. That covers everything from the discipline around perfecting the timing of paying invoices (not too early and not too late) to things such as the invoicing processes on the receivables side. To get started, here are some cash-related strategic management questions to ask:

  • How are the projects the company is bidding on going to impact its cash position in the future?
  • Should throughput be increased? Should the company offer more services or expand to new markets?
  • How can the cost of goods be decreased? Is there a way to get a bigger spread on materials and get employees to be more efficient?
  • How can payments be collected faster?
  • Where and how can overhead be reduced?

Seeing these financial trends in both historical and predictive terms gives context and the opportunity to course correct in areas where there are downward trends. While humans could get answers to these questions, the time and effort to do that is overwhelming and unrealistic.

Construction managers may wait for their CPA or accountants to give them a year-end report where they expect to have that “ah-ha” moment about business successes and failures. Unfortunately, that never happens. It’s time to recognize that year-end accounting statement is not meant to provide business insight. An accountants’ primary expertise is to review financials and make sure that they comply with the rules, not necessarily to unlock insights from them. What accountants and CPAs can do is help to ensure financial data is in good order. Combined with automated workflows, clean data can be piped into a sophisticated analytics platform that will direct higher-level decision-makers in accurately interpreting their business.

Use Financial Stories to Inspire Cultural Change

Every book tells a story, and financial books are no different. Too often, however, reading those books is like reading English with the words all out of order. One may understand what they mean individually, but can’t understand the story because it’s lacking context.

To extract a meaningful narrative from the strings of numbers in spreadsheets, there must be a translator. Analytics platforms do this by providing context and connectivity for operating decisions. This in turn defines appropriate long- and short-term goals and provides strategies for achieving them. This might include understanding if the business model is working or if adjustments need to be made to the projects being bid on. Maybe there needs to be more projects with more diversity or perhaps the business model needs to be fixed so that when the company procures new clients, the work is profitable. If a company is pursuing more business and more debt, then it needs to be doing so from a solid business model.

Ultimately, storytelling drives the communication required for a full cultural transformation. This occurs when all the departments of the project understand the impacts that their choices make on the overall financial health of the business. For the first time, managers have a chance to evaluate their behaviors and how that may be affecting the overall business performance. What results is a sustainable release in working capital for other types of investments or emergency measures. In short, analytics give a company a consistent toolkit to make better decisions.

In times of business uncertainty, it’s critical to have a command of the company’s financial position. Without good cash flow strategies, the company may miss capitalizing on the many opportunities that a downturn brings—such as picking up key qualified staff and discounted equipment.

Hardships are a time to reevaluate and it’s important to never let a dramatic change in the business environment go to waste. This could be the ideal time to pivot the construction company from a legacy business model into emerging technologies like data analytics. With improved financial management through analytics, well-organized construction companies will be positioned to roar out of any economic downturn and acquire the projects and talent needed to seize opportunities for expansion in the coming years.

by Bassem Hamdy
Bassem Hamdy is vice president of Toronto-based CMiC.

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