Are You Using Your Financials Like a CPA Would?

The Pavement Network crunched numbers and determined a benchmark—a weighted average for each of the categories its members track. The weighted average is essentially the median within each category. Each season when financials are submitted and crunched, each contractor receives information on how a particular category is performing relative to the weighted average.

A rating of zero indicates that the company's finances are statistically equal to the median for that category. A minus number (-1, -5 etc.) indicates the company is performing 1% or 5% worse than the median. A positive number indicates the company is performing better than the median. Members who are underperforming the median can then examine how much they differ from their peer group and what, if anything, they should do about it.

"One of the most important aspects of the Pavement Network is that we each have a number of other companies to turn to help us solve problems or to get another perspective on what we're doing," Green says. "There's a real value to being able to talk with someone who does the same kind of work you do."

So a member reporting, for example, a -22% difference in paving material costs might turn to a member with a +5% rating to see what they have in common—and what they don't.

[Note: Pavement Network has documented that material costs is one of the more difficult areas to tweak. These costs are the hardest to analyze because there's a great volatility among material costs in different parts of the country. But even though they can't be reduced as much as other costs, simply knowing the costs by job type and knowing that's one cost that can't be altered significantly enables Network contractors to focus on other areas of financials where they can have a greater impact.]

But there are material cost factors that the contractors can look into: delivery costs, number of suppliers, accounts receivables payments, waste, and more. By discussing these costs with another member, a contractor might be able to realize some cost reductions he would not have thought about had he not learned his paving materials costs are out of line with other Network members.

Breaking even

Green and Carr say Pavement Network's financial matrices enable members to do something all contractors should do: determine a break-even point for each company, based on its operating expenses.

"You need to know your break even and your operating costs to feel assured that your year will be successful," Carr says. "You want to have a lot of upside in operating."

Green says that contractors who don't know their break-even point put themselves in a position that can be risky and perhaps lethal for the company. "If the break-even point is low, then the upside potential is very great and you can look to a good and very profitable year," Green says. "But if the break-even point is high, if you have to do 80% or 90% of capacity just to cover your operating costs, you have a limited profit potential. You need to then look at costs to reduce your breakeven point and increase profit opportunities."

Plus, any company with a high break-even point risks not being able to cover its operating costs should the market become weak or material costs (fuel, hot mix, sealer) or even replacement equipment costs rise unexpectedly. Once a contractor knows his break-even point he can begin to analyze other financial categories to see what he might be able to do to reduce the break even or to increase sales.

"One of the things that becomes evident through this process is that not all problems, and not all solutions, are cost related," Green says. "In some cases they are sales or even pricing related and the answer or solution is to raise your prices."

Insurance savings

Green says the Network's biggest impact has been in helping members control general and administrative costs and labor costs. He says when they began comparing G&A costs the first item that jumped out was insurance costs, which ranged widely among members.

So Network members took a closer look at their own insurance programs, talked with one another, and came up with a few fairly basic suggestions members were able to implement to significantly reduce insurance costs while maintaining or even improving coverage.