Contractors are an ironic lot. They are bottom-line focused, numbers oriented people who, on the whole, rarely look at the numbers. Well, rarely look at the right numbers anyway.
Small businesses operating outside of the construction industry are almost universally focused on sales volume. Their logic being "If sales are solid, all else must be okay." Due to fixed margins and cost ratios, that logic can hold...for them. "I'll make it up in volume." is a strategy guaranteed to break a contractor. Fortunately, most contractors know better than to fall for that trap.
Contractors are always thinking margin; thinking about it, talking about it, obsessing about it and complaining about it (justifiable so in today's price slashing, everybody's insane bidding environment).
Margin is a good thing to think about. It's a good start. It's not the end. It's not the ONE.
Another number contractors watch closely is their checking account balance. Most use it as their measuring stick for their business' success. That's not a good thing and certainly not the ONE number to watch closely.
What is the ONE?
The ONE would be the number that reflects your business' health. It would be a number whose meaning you knew so well that a quick glance would tell you exactly what you need to do and how urgently you need to react to a negative trend.
Have you boiled your company's performance down to one number? To a number that would tell you whether you had a good week or bad week? To a number that would tell you whether you were making money or not? To a number that you could look at while sitting on a beach and be confident you could safely stay a couple of days longer if your family wished.
Rest assured that ONE number exists and soon we'll show you how to build it for your business. Just not in this article. You need to walk before you run. We need to identify with the numbers that will come together to create the ONE number you need.
Today we're going to show you the data you should be keeping a close eye on. This data can be presented easily and clearly on a one page report, commonly referred to as a Flash Report.
If you listen to your CPA or banker, he (she) is going to tell you to focus on your monthly profit and loss statement (income statement). But, hey, we're business coaches. We approach things a little more seat-of-the-pants than that.
Profit and loss statements are poor predictors of future performance. As such, they cannot give you the depth of information you need to rest easy. Predicting future performance is your Flash Report's role. It does so by showing you how well the drivers of your business' success are progressing. Luckily for you, we have extensive experience with the inner workings of construction companies. We can point out most of the numbers you need on your Flash Report without knowing which type of work you specialize in.
Gross Profit
Creating Gross Profit (GP) is your business' most important task and core purpose. GP pays your overhead and generates your wealth. Your Flash Report should show how much gross profit has been produced in the past week and how much has been produced year-to-date. Show actual, budget and variance. Break out revenues and direct costs by materials, labor, equipment and subcontracts.
Accounts Receivable
How big are they? How old are they? How do they compare to a month ago? What percentage of sales are they? These are the numbers to put on your report, broken down by age (30, 60, 90 days).
Accounts Payable
How big are they? How old are they? What percentage of sales are they? How do they compare to cash on hand? Sound familiar? Put them on your report broken down by age (30, 60, 90 days).
Over/Under Billing
Are you over-billed or under-billed? The answer is a strong indicator of upcoming cash flow. If you are heavily over-billed, your cash flow will dry up as your jobs draw to a close. You get your over-billing/under-billing number from your Work-In-Progress report (WIP). If you haven't read our article on WIP reports, do so.
Cash
Show cash in bank. Cash need for next week's expenses. Cash expected to arrive next week.
Overhead Expenses
Show total overhead expense for the past week, month, year-to-date, and variance from budget. There's really no need to break it down by line item. Pull a profit and loss report from your accounting system if you wish to see the detail.
Sales backlog
How much work is under contract? How many man-hours does it correspond to? How many weeks would it take to finish the work?
Sales Effectiveness
What was last week's close rate? How did that compare to one month ago? What is the sales team's year-to-date performance? What mark-up was the work closed at? How does that compare to one month ago? What is the year-to-date mark-up? How does those numbers compare to budget?
Proposals Outstanding
Show the dollar value you have out for bid. Show the dollar volume sold but not under formal contract yet. Show the targets and variances for each.
Field Productivity
This one is your best indicator of future financial performance simply because profits follow productivity. List field productivity per major activity. Show no more than five activities. Show performance the past week, month-to-date and year-to-date. Compare performance against budget.
Indirect Labor
Indirect labor is often the unseen leak in your profit performance. Unless accounted for properly, it remains buried in job costs never to be discovered. It is time to bring it into the light. Show the total hours charged by operations personnel to operations overhead and to general overhead. Hours associated with milling around due to poor scheduling, unforeseen interruptions, weather delays, equipment breakdowns are all examples of labor time that should be charged to a cost code for indirect labor. Present the usual numbers; week's results, year-to-date, and budget variance.
Now we ask you, if you received a Flash Report that showed you the information we just described wouldn't you feel much more in control of your business? Wouldn't you be able to better detect trends and take corrective action before the deteriorating performance crippled your bottom line?
Of course you would.
Should you need help putting your flash report together or getting your business back on track, give us a call.
Ron Roberts teams with Guy Gruenberg as The Contractor's Business Coach. They show contractors how to grow their businesses profitably. To sign up for their FREE Newsletter or join their Private Club, visit www.FilthyRichContractor.com.
