Do you know where your company stands financially?
All business owners (including contractors) need to determine where their companies stand in relation to the past and to others in their respective industries. Unfortunately, too many contractors fail to do so and, as you can imagine, this can undermine their bottom lines.
Fortunately, there are ways to keep track of key performance measures using proven benchmarking methods.
Look for Improvements
The first thing to know about benchmarking is that it’s a very effective management tool. Benchmarking tells you how your company is performing and helps to identify areas for improvement. Benchmarking can be accomplished by comparing information internally or externally.
Internal benchmarking is a way of using your trended historical financial information in order to identify potential weaknesses and opportunities within your operation.
If, for example, your profit percentage is decreasing, benchmarking will alert you early, so you can determine why it’s happening and formulate an appropriate response. Similarly, if your percentage of repeat business is declining, benchmarking can give you a heads-up so you can identify and correct the problem.
External benchmarking helps you to compare your performance to those of peer companies. For instance, how does your debt-to-equity ratio, days’ sales outstanding, profitability or time to completion compare with those of your competitors? Comparing your performance to peer groups is a great way to help highlight areas of strength, areas of weakness and opportunities for improvement.
Industry organizations, such as trade associations, can be a good source of external benchmarking information, though they tend to have a regional focus.
However, be wary of the source and content of any study you review. National benchmarking studies, while informative, may not be useful for local or regional businesses because construction practices vary widely across the country. Similarly, a contractor with national reach may find local or regional data to be less helpful or even misleading.
Choose Your Metrics
The specific benchmarks used should be the key performance indicators that have the greatest impact on the success of your company. A plumbing contractor, for example, might be less concerned about capital equipment costs than an excavator would.
While these metrics may vary from one company to the next, most contractors should be interested in the following:
» Working capital
» Profit margin
» Profit fade
» General and administrative expenses
You’re also likely to look at labor costs (including overtime), overhead, materials and equipment costs, cycle time, and change orders and late work orders (those submitted after cutoff dates).
In addition, surety information, otherwise known as how your bonding capacity compares to that of your peers, is valuable. Your bonding company is likely to be the most important user of your financial statements, and any benchmarks you establish in that area can only help your capacity, especially if you can demonstrate that you’re working to improve.
When deciding which benchmarks would be best for you, consult with your financial adviser. However, these analytics should generally be measured over a three- to five-year period.
Use the Right Measurements
Once you’ve determined your key performance indicators and established your benchmarks, assemble the data needed to measure them. Again, your financial adviser can be a good partner in the process.
Make sure you’re working with complete information that’s relevant to what you’re measuring. A single financial statement from five years ago won’t provide an accurate representation of what you were doing back then, and a marketing summary that confidently predicts you’re going to double your gross revenues next year isn’t a realistic guide to the future.
Lastly, once you’ve started the benchmarking process, it is important to maintain discipline and make it a part of your regular financial reporting routine.
Spread the Word
Benchmarking results shouldn’t be hidden in a drawer. It’s critical to share them with your team. Why? Even if you generally like to hold your financial data close to the vest, sharing certain results can be a great motivator. It’s one thing to know your equipment maintenance costs are on the rise. It’s another to have managers who are determined to ferret out why and be aggressive in turning them around.
For the same reasons, consider sharing benchmarking results more widely within your company. All your employees will likely have an interest in the findings—particularly those whose departments were measured. Spreading the word can build enthusiasm that will carry you through any needed changes and keep existing excellence in place.