The Big Idea with Ron Davis
3 Steps to Avoiding Financial Surprises
If you had just one really great idea you could share with the alarm industry, what would it be?
This month we feature Mark Gronowski, partner with consulting firm Barnes Associates.
GRONOWSKI’S BIG IDEA:
Account properly for deferred revenue; track RMR regularly and consistently; and break out labor and equipment costs between service and consultation functions so that creation costs and service margins can be accounted for correctly.
hen you meet Mark Granowski, you might think youre in the presence of an NFL linebacker. He stands 6-foot-4, and in all the years I’ve known him — about 20 — I’ve never discerned there being a whole lot of body fat to him. So ti would be understandable if you assumed the Gronowski was just some aging jock. Not true. Not by a long shot.
As a partner with Michael Barnes in consulting firm Barnes Associates, Gronowski has become on of the most recognized financial experts in the industry, and an investment banker who knows how to get things done. We’ve crossed paths quite a few times. And it’s always been educational for me — he just knows so much about transactions, such as the buying and selling, and marketing and pricing of an alarm company.
When I asked him if he could share the most important advice regarding the financial side of running a security business, Gronowski answered concisely. First, “account properly for deferred revenue,” he said before adding “track RMR regularly and consistently” and conluding “break out labor and equipment costs between service and installation functions so that creation costs and service margins can be accounted for correctly.”
I though about it for a little while and decided that what Gronowski had provided were the keys and methodology to addressing the mantra, “the only surprise we ever want is no surprises.” There are plenty that crop up, so how do we avoid them?
ISSUES ARISE DURING INEVITABLE SALE PLANNING
Let’s take a look first at the part of Gronowski’s statement about tracking RMR. Believe it or not, if you are a security integration business owener reading this, at some point you are going to sell your business. When that time comes, if you have kept accurate records about you RMR and its concurrent attrition, you will be able to provide the next generation of owners with a roadmap of where the company has been, pointing them to where the company is going. Attrition rates, particularly gross attrition (i.e. all thos accounts lost for whatever the reason), will tell you and a prospective buyer just how well you’re taking care of the customer. If those numbers are not good, fix them now while you still can.
Now let’s get back to the inital part of Gronowski’s response dealing with accounting properly for deferred revenue. That would imply that every alarm dealer knows what deffered revenue is, and I can tell you, many don’t. Deferred revenue is, very simply, revenue that you have billed and collected but for which you have not provided service. An example might be if you billed your clients for a full year in advance on monitoring and have only provided two months of actual service out of the 12 month’s agreement. The monitoring charges for the 10 months that have not been collected are therefore “deferred revenue” and usually deducted from the purchase price of the company. For those of you who bill quarterly, semiannually or annually, this can come as a big surprise.
His third piece of financial planning advise to running a business is what engineering plans are to constucting a building. They provide a detailed structue from which you know exactly where to go to next and what to do. Your financial plans, expecially with the kind of detailed breakout that Gronowski suggests, can tell you in a minute where your business stands. What you’re looking for in managing your company is a detailed plan, with full knowledge of what all your costs are.
Without good financials, you’re operating in the blind, and usually this comes to light at about the same time you are considering or have made plans to sell your company. Unless you were planning on selling it at a discount, now might be a pretty good time to put your “house in order.”
Ron Davis is Security Sales & Integration‘s “What’s the Big Idea?” columnist and contributing market analyst. He is president of Davis Group, a full-service consulting firm serving the security industry, which also includes GraybeardsRus. He has 35 years of industry experience, including founding Security Associates International in the 1980s.