Are You Using Your Financials Like a CPA Would?

One of the things they learned, which other contractors can easily take advantage of, was that members with lower insurance costs had policy renewal dates that were not year-end dates. By moving policy renewal dates to those times of the year when they weren't as busy, Network members could take the time to analyze their options, compare prices, and shop their business around. Combined with other insurance tweaks, Pavement Network member companies in 2004 were all within 1% of the median insurance costs.

Analyzing labor costs

Labor costs are difficult to analyze, not only because of regional differences in wages but because some contractors must hire union labor, which significantly raises their labor costs. In other areas where labor is plentiful the costs are skewed unusually low relative to contractors in other areas.

The financial matrix the Network is working from attempts to equalize these factors as much as possible. "But at certain points we just have to realize that one member is going to have higher or lower labor costs simply because of where he's located and there's nothing we or he can do about that," Green says.

Some Network members break labor costs down by type of work and some don't. By breaking it down by type of work it gives contractors a better opportunity to tweak their labor costs because they have more detail with which to work. Pavement Network figures showed that Total Direct Labor Costs ranged from 11% to 17% of sales, or 11% to 28% of total operating costs.

Another interesting labor-related category in Pavement Network financials is gross sales per employee per year, which ranged from a low of just under $139,000 to a high of $196,000. This metric is an overall indicator of how efficient your company is being managed and it's a simple calculation for any contractor to make, dividing gross sales ($1 million, for example) by the total number of employees (let's say 10) for gross sales per employee of $100,000 ($1 million ÷ 10 = $100,000).

What does it mean if your company averages $100,000 gross sales per year per employee? Not much, in and of itself. There are likely good reasons you are lower than the Pavement Network's contractors. Perhaps your business is seasonal due to location or services offered as compared to Network members. Or perhaps you only offer a single service, sealcoating for example, where Network contractors generate more sales out of each visit to a property (crackseal, sealcoat and striping).

What's most important is what these gross sales per employee numbers show over time. Contractors who track gross sales per employee on a monthly basis most likely can expect gross sales per employee to decline in off-season months; year to year, however, they should actually grow in peak months as the business grows.

If you realize that per-employee sales are sliding in what should be a busy month, that's something you need to look at. Are you less productive? Is old equipment breaking down? Do you have a lot of new employees who are slowing work because they need to be trained so aren't as productive? Are you bidding with tighter margins to get the job? Are your sales people not meeting their goals? Any number of these or other reasons (or combination of reasons) can result in lower gross sales per employee, but it's important that contractors recognize the change so they can make any adjustments in their business to compensate for it.

The buddy system!

But not everyone is or can be a member of the Pavement Network, so how does this approach help other contractors?

"People need to overcome the fear of allowing others, particularly others in the same industry, to see what goes on in their company," Green says. "That's not to say you want everyone looking into your numbers and it doesn't mean you're going to show your competitors what you're doing. We're all competitive; that's what makes a business person successful."

Green says Pavement Network members are located geographically far enough away from each other so they do not compete directly; other contractors can help themselves by finding a contractor like themselves in another part of the country.

"It can be just one-on-one or you can have more people involved, but you have to have a rapport with them and you all have to be willing to reveal information that you might not have revealed up to this point."

Green says it's also important that the people you engage with are candid and willing to talk openly about their business as well as yours.