With the season slow or stopped, contractors are reflecting on how 2005 went, what 2006 will bring, and what they can do to squeeze another percentage of profit from the upcoming season.
Most contractors begin by looking at their financials, the breakdowns that show how much it cost the company for materials, labor, sales, office, and more. But as you look at the numbers (you do have the numbers to look at, don't you?) how do you decide what you can do to generate a little more profit? Sure, you can increase your gross sales (through more aggressive selling, marketing, or some type of expansion), assuming that if your gross margin percentage remains constant and with your fixed costs covered that most of your additional revenue after direct and indirect costs will fall to your bottom line. But that does require somewhere along the line an increase in fixed expenses (sales and administration) to support the additional revenue.
But if you simply want to determine if your company is performing at its optimum level, how do you go about doing that? What numbers do you look at, and, more importantly, how do you know if your numbers are where they should be so you can be as profitable as possible?
Well, 13 contractors throughout the United States have at least a little bit of a handle on how to make sure they're as efficient as possible, and they've agreed to share some of their information with Pavement readers. The 13 contractors, part of the Pavement Network, range in size from $5 million in annual sales to $30 million in annual sales. Among them they perform all types of paving and pavement maintenance work, though not all 13 companies perform all types of work.
"What's important is to look at your financials on a monthly, quarterly, and annual basis as a tool to help you manage your operation and find the strengths and weaknesses so you can capitalize on your strengths and turn your weaknesses into strengths. That's what financials are designed to do," says Harold Green, president, Chamberlain Contractors, a Pavement Network member. "When looking at financials it's not the bottom line profit that matters, it's understanding how you get to that bottom line that's important."
Over the past six years the Pavement Network has developed a financials reporting process that member companies use to report their financial figures to the entire group. The form, still being tweaked, tries to equalize much of the differences among the contractors so that the numbers, when crunched and available for analysis, are used in an agreed-upon standardized fashion.
The number crunching shows each member company's figures broken down into broad categories such as revenue, material costs, indirect costs, sales costs, and labor costs. Within each category members are encouraged to break their financial information down even more by type of work performed, for example, revenue generated, material costs, and labor costs for that type of work.
Not all members do this yet, but those that do have a better idea of how their costs line up with their revenues generated from a particular service category. They can determine, for example, that in a given month cracksealing revenue was $100,000, labor was $10,000 (10%), materials cost was $16,000 (16%), direct and indirect job cost $20,000 (20%), and gross profit (margin) was $54,000 (54%).
Rob Carr, with Network member Carolina Asphalt, says most contractors, including his company, keep a check on their operation by comparing actual financial figures to their annual budget. "When the financials are off budget then we know we have to take a close look and figure out why that happened and what we can do about it," Carr says.
But comparing your numbers to your budget doesn't offer the opportunity to compare to what other contractors are doing, and against a sort of benchmark. So the Network members use their financial statements to see how they relate to others who do similar kinds of work.