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Finding Opportunity in Change - An Outsourced Financial Program

In 1950, an Indianapolis 500 pit stop took roughly 67 seconds. By the 2013 Melbourne Formula One Championship, pit stops were clocking in at 4 to 6 seconds, and that includes changes for all four tyres. The miraculous improvements in speed are a result of incr.....

Construction - 4 min read

Do you have clear ways to measure the financial health of your construction business? The following KPIs are essential for companies large and small, and will empower you to document your progress, make smarter decisions and ensure future growth.

 

1. Cash Flow


You can get an overall snapshot of your cash management by collating bank balances, billings and invoices, contractual commitments and payroll obligations. A clear and accurate picture of your overall cash position at any given time will help you to make confident business decisions.

 

To form a picture of your cash flow, track the following indicators:

  • Cash demand periods
  • Days in accounts receivable
  • Days in accounts payable
  • Overbilling and underbilling

 

2. Profitability

Profit analysis allows you to catch deviations before they throw off your scheduling and bottom line. By tracking your estimates and change orders, and by drilling down into material orders, subcontractors and cost codes, you can track profitability and zero in on potential problems.

 

Profitability KPIs can be broken down into several categories:

  • Gross profit margin. This KPI is calculated by dividing the Direct Cost of Work by Revenue. This figure reveals the percentage of revenue that is not paid out in direct costs. Essentially, it indicates how much of your gross profit can be generated by each dollar of future sales. The higher the number is, the more efficiently your company is running.
  • Net profit margin. You can calculate this metric by subtracting Indirect Costs from Gross Profit and then dividing the result by Revenue. Over time, this KPI acts as an essential barometer for your business. It measures how many cents profit you generate for every dollar you sell, and can also show how well you’re stacking up against competitors. Use this KPI to prepare forecasts, and strive to increase the margin.
  • Return on equity. Divide Net Profit by Owner Equity to determine your Return on Equity. You’ll want to have this KPI at the ready to show how much profit is being returned on shareholders’ equity each year. Investors will want this information; it can be an important selling point when you’re trying to raise funds.

 

3. Average Revenue per Hour Worked

Effectively managing your staff’s time can increase productivity and profitability, and this KPI can highlight which types of projects are most profitable for your company. Without this information, you may focus on jobs that seem like they should be the most profitable but actually aren’t.

 

4. Time and Cost Rate

This KPI can help you to forecast the length of time and cost for your upcoming jobs, and allow you to offer more accurate quotes and improve your cash flow. You’ll also keep clients happy by delivering on time.

 

5. Liquidity

Liquidity KPIs measure your ability to meet short-term financial obligations; an essential quality in any construction company. Track your liquidity ratio by dividing your current assets by your current liabilities.

 

For more information about KPIs for your construction company, or to learn about our CFO services, reach out to us at Altus Financial.

 

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