4 Key Metrics to Track for Your Construction Business Growth
It is very important for every business, especially for construction industry to manage not only operational aspects but also financial.
Sometimes it’s easy to lose sight of the big picture while trying to conduct day-to-day operations. As a result, you might not have a clear picture of your company’s financial health.
Key metrics can help you measure the performance of your business and plan accordingly.
1. Net income
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, it is your profit. I recommend analyzing two main margins:
Gross Profit Margin = (Revenue – Direct Cost of Work)/Revenue. It indicates how many cents of gross profit can be generated by each dollar of future sales. The higher the number the more efficient the company runs.
Net Profit Margin = (Gross Profit – Indirect Costs)/Revenue. It measures how many cents of profit the company is generating for every dollar it sells. This metric is one of the most important as sometimes we forget about fixed costs, like taxes, insurance and labor. While focusing on each project separately we have to include those costs to make sure we get a complete picture of how each project performs.
2. Cash flow
Money comes in through job projects and then goes out to pay expenses such as labor, equipment, taxes, insurance, and loan payments.
Sometimes the payment is recorded through accounts receivable. In that case, you would want to know how fast your company collects on invoices to make sure you have a sufficient cash flow to fund your expenses.
Cash inefficiency can create big debt issues that can be hard to overcome when not managed properly.
3. Borrowing capacity
Your borrowing capacity is about your ability to make a profit and repay your loans. Keeping an eye on your leverage strategy will help you take advantage of new opportunities.
Debt to Equity = Total Liabilities/Owner Equity. One of the most important financial ratios, this measures how highly leveraged your company is. A higher ratio creates additional risk. A ratio of 3.0 or lower is usually desirable.
Revenue to Equity = Revenue/Owner Equity. A high ratio indicates you have less flexibility to absorb project losses.
Liquidity indicators are particularly important to your financial partners and creditors, because they show how fast you can meet short-term obligations.
Current Ratio = Current Assets/Current Liabilities. Watch for big decreases in this number over time. The higher the ratio, the more liquid the company is.
Working Capital Turnover = Revenue/(Current Assets – Current Liabilities). Working capital measures the funds available to invest in operations to generate more revenue.
This is a great tool to use at least once a year. By using Key Performance Indicators you can spot trends on what strategy should be implemented in order to gain some ground.