Leading a smarter commercial integration business is more than delivering great AV or IT solutions. Managing the business requires the same precision as designing an automation program or linking diverse devices under a control system. As mentioned in the planning process, a true, right-sized financial review process with a well-developed analysis of costs is an important foundation to sustainable success for integrators.
Working down an income statement, revenue is a clear starting point. A quick analysis of sales minus discounts reaches this data point quickly. Next, is to determine the cost basis which is comprised of direct and indirect measures as well as operating and capital costs.
Steps for Financial Review Process
Standard short-term measures associated with direct sales of services and products are an easy starting point. You can quickly calculate them from an income statement.
- Cost of Goods Sold (COGS) includes all direct costs to produce and deliver services including equipment, materials, subcontracted labor, and other job-specific expenses.
- Managing these costs closely helps protect margins.
- Cost per Unit (CPU) tracks the cost to deliver one unit of service such as a room install, a rack, or a system package including materials, tech time, and any third-party services.
- Understanding unit costs helps with quoting and scaling.
- COGS as a Percentage of Revenue (CPR) is a quick indicator of how much revenue is eaten up by direct costs. High percentages signal margin erosion.
- Keep this number in check by negotiating vendor pricing and managing scope creep.
How to Calculate OPEX
Next, operating expenses (OPEX) include costs not directly tied to delivering services like rent, insurance, sales commissions and admin salaries. For integrators, costs can quietly drain profit if left unanalyzed and unchecked.
- Operating Expense Ratio (OER) shows the percentage of revenue consumed by operating costs (excluding COGS). A lower ratio means leaner operations which helps integrators survive economic downturns and manage costs effectively.
- Review this measure quarterly to flag increases and justify overhead.
- Cost per Employee or Labor Hour (CPE) includes wages, benefits and training per hour of productive work.
- It’s critical for pricing services and understanding labor ROI.
- Pair this with billable hour data to find gaps in workforce efficiency.
- Resource Utilization Rate (RUR) measures how effectively people and equipment are used to generate revenue.
- Are project managers underbooked? Are racks and amps sitting idle?
- This rate helps spot wasted capacity and inform staffing or capital purchases.
Why Burden Rate Matters
One important measure of the operating expenses category is the Burden Rate. Sometimes overlooked, this rate calculates the true hourly cost of an employee, factoring in payroll taxes, benefits, PTO, training and overhead allocation. It essentially accounts for associated costs and is critical for accurate job costing and margin planning. Failing to apply burden rate can make projects look profitable when they’re not.
Calculating the burden rate is simple. Gather all of these indirect labor costs and divide by direct wages.
- Track total indirect labor costs for each category (payroll taxes, insurance, PTO, etc.).
- Divide by total direct wages paid.
- Adjust for utilization. If techs only bill 32 of 40 hours weekly, your labor cost per billable hour rises ~25%.
Typical Burden Rates are as follows:
- Field Technician: 35 to 50%
- Lead Installer: 40 to 55%
- Project Manager: 45 to 60%
- Engineer or Programmer: 50 to 60%
- Warehouse/Support Staff: 30 to 45%
Understanding the Full Financial Picture
Tracking individual metrics is useful, but the real power comes from using them together to create a full financial picture. If your COGS percentage is rising, but inventory turnover is slowing and burden rates are stable, the issue may be overbuying or weak project scoping. If your OER climbs but utilization is flat, you may be carrying too much overhead relative to revenue.
Good leaders are keenly aware of internal trends. Knowledge is a powerful asset. Take command of the situation and allocate a few minutes every month to analyze your cost structure using these measures. Look for trends across categories and time periods. Benchmark against industry norms when available. Review reports monthly and assign accountability for any variances.
Utilizing the Right Tools
As we know, for integrators, tech can be a valuable tool to speed workflow and understanding costs. Use accounting software that supports job costing and payroll integration. Combine this with enterprise reporting planning or project management platforms to capture labor hours and equipment usage. Here, automation is helpful to integrate systems and publish reports with key measures. Manual tracking leads to blind spots.
Real growth requires not just tracking topline revenue but track these standard cost measures. This discipline will pay off by making smarter bids, managing cash better and scaling with less friction. Those that don’t are guessing at margin, over-investing in gear, and leaving profit on the table. Establish an integrated reporting system and publish the numbers. Review them often. The work doesn’t stop at the rack. Neither should the data.
Watch for the next article, which provides solutions when ego clouds leadership, competence and governance…at the top.
Ron Pence is an accomplished business executive with CI industry experience.
