The Value of Benchmarking
It may seem easy to figure out how well your company is doing -- you just look at whether or not you made a profit this month or this quarter. But you need to dig deeper if your profits are erratic or not at the level you'd like or expect them to be. You need a way to measure your business's performance in key areas and to identify areas that can be improved.
For starters, you can compare current and past performance to identify trends. Another approach: Compare key metrics with those of successful construction firms of a similar size. The data and insights gained from this type of performance benchmarking exercise can be invaluable.
Use credible data from similar sized companies within your geographic region for your analysis. Choose an industry group source -- generally based on NAICS code -- that best represents your business. Attending regional or state trade meetings can put you in contact with other contractors who might be interested in swapping information. And look into joining national industry and trade associations so you can access the financial and surety data they collect from their members every year.
This is a critical area for measurement since access to bonding and credit will depend on your business's financial health. Important metrics include:
o Profitability ratios, such as gross profit margin, return on assets, and return on equity.
o Liquidity ratios, such as the current ratio, which measures your firm's ability to pay off short-term obligations as they become due.
o Underbilling ratios, such as the underbillings to equity ratio, which measures the percentage of your business's net worth represented by work performed but not yet billed.
o Backlog ratios let you know how long it will take to complete work under contract.
o Asset utilization ratios, such as a fixed asset ratio, measure how efficiently your company is using its assets.
o Debt utilization ratios help your business measure its liabilities in relation to its earnings ability and asset base.
You can also look at metrics such as gross profit per project manager to identify areas where employees may need additional coaching and training.
This generally includes everything from staffing and productivity to office flow and analysis of procedures performed. Potential areas for analysis and comparison include:
o Job site accidents
o Number of change orders
o Productivity levels per employee
There are other areas in which comparing your company's performance with that of a competitor can be helpful. For example, look into sales and marketing issues and your firm's fuel and energy use.
If you would like advice and input on the most effective way to benchmark your company's performance, please call us. We can help you set up systems that will capture the data critical to your growth.
The data and insights gained from this type of performance benchmarking exercise can be invaluable.
Need help getting started? David Hart specializes in helping with business valuations.
Would you like to read more articles for contractors and the construction industry? Click here.