Tracking your performance is key to growth
For any business to grow and prosper, you must track and gauge its performance over time. This is true in the construction industry as well. As you manage day-to-day operations, it’s easy to lose sight of the big picture. As a result, you might not have a clear understanding of your company’s financial health.
Key metrics can help you measure the performance of your business and track how it stacks up to competitors. A careful analysis will uncover any problem areas causing you to lag behind and lose money.
Here are six key metrics you can use to measure the performance of your construction business
Metric 1: Net income
The first – and perhaps the most important – metric to review is your net income. This is your remaining income earned after taxes, deductions, and expenses have been taken out. In other words, your profit. There are a few key components to review to determine your net income, including your payroll, business expenses, and material costs. Compare these figures against previous years to see if there are any changes. Analyzing your net income can help measure your performance over a period. This will allow you to identify trends relating to expenses, efficiency, and areas of waste so you can improve benchmarks.
Metric 2: Cash flow
Cash flow is the net amount of cash and cash-equivalents going into and out of your business monthly. Money comes in through job projects and then goes out to pay expenses such as labor and benefits, supplies, equipment, taxes, insurance, rent, and loan payments.
In most cases, projects are charged and paid through accounts receivable. When analyzing cash flow, you want to measure how fast your company collects on invoices before the money goes out again to pay expenses. Of course, the measure of a healthy construction business (or any business, really) is to have more money coming in than going out. Unfortunately, many owners have no idea how much cash they actually have on hand, and this can get them into trouble.
Metric 3: Borrowing capacity
Your borrowing capacity is the amount a bank is willing to loan you to finance new projects. This is a direct reflection on your ability to make a profit and repay your loans. Your borrowing capacity will be determined by a lending agency, using factors such as debt-to-equity ratio, the backlog of current projects, and the leverage ratio of your company.
Metric 4” Bonding capacity
The bonding capacity of your construction business is extremely important, as it can determine which new jobs you can pursue. Bonding capacity is determined by your insurance company and refers to the maximum amount that will be insured for new projects.
Three main categories can affect your bonding capacity:
- Your company’s reputation in the market/field/category
- Your capital, including debt-to-equity ratio, retained earnings, a backlog of contracts, working capital, credit, and under billings
- Your record of successful completion
Metric 5: Your competitors
Once you’ve reviewed all these metrics, the next step is to look at your performance against other companies in your market, field, or category. Financial and performance information is available for all public companies through online quarterly reports. It’s a little difficult to find this information for private companies, but there are services available. Your CPA may also be able to get a hold of this information. Comparing your company to others in the industry will help you identify best practices so that you can make changes and improvements to your business.
Metric 6: Predictive key performance measures (KPIs)
Understanding your financial picture and how your business stacks up to competitors are vital when measuring performance. However, it’s also important to conduct predictive KPIs. “Predictive KPIs are forward-looking; they can drive changes in behavior and influence results,” according to the Construction Financial Management Association.
Examples of forward-thinking KPIs include:
- Pending bids in preparation
- Scheduled and completed business development meetings
- Active bids and prospects and probability of winning them
- Meetings with subcontractors about existing and new GCs to find new work
Knowing these indicators will give you a better idea of future income long before issues might develop. They will also help you make key decisions about purchases, staffing, and bidding.
Looking at these six key performance metrics will enable you to understand your successes and where you need to make improvements. They will also help you make better decisions regarding future business needs and allow for the continuous growth of your construction business.
No Boundaries Advisors has been helping construction businesses grow for over 25 years. Contact us today to find out how our expert staff can help you meet your financial goals.
