When you go to the doctor, the first thing the medical staff does is check vital signs such as your temperature and blood pressure. That’s because if any of these measurements are outside the norms, you might have an underlying problem that the doctor needs to address.
For the same reason, construction company owners should regularly check key performance indicators (KPIs) of their businesses to monitor financial health and equipment maintenance.
Certain ratios calculated using your financial statements can serve as particularly valuable KPIs. They enable you to gauge how your company is doing, compare its current position to past results and even see how you’re measuring up against other similar construction businesses.
Indeed, industry “benchmarking” can provide an early warning of financial risks. Data is available from a variety of sources, including the Construction Financial Management Association (CFMA).
The CFMA’s Construction Industry Annual Survey provides a variety of financial ratios and other KPIs, broken down by company size, industry sector and region. The right measures for your company will depend on factors such as its size and specialty, but here are a few examples:
Current ratio (current assets ÷ current liabilities). A valuable KPI for construction businesses, current ratio measures liquidity — that is, the ability to satisfy short-term liabilities with cash and other liquid assets. In the CFMA’s 2021 survey, the average current ratio was 1.7 (or 2.4 for smaller businesses; that is, those with less than $10 million in revenue).
Months in backlog (backlog ÷ [revenue ÷ 12]). This indicates the number of months it’ll take to complete all signed or committed work. A lower ratio may signal that the company needs new contracts to maintain consistent revenue. In the CFMA’s 2021 survey, the average was 7.9 (5.8 for smaller companies).
Debt-to-equity (total debt ÷ net worth). This measures your construction business’s use of leverage. A high ratio enables you to earn more on invested equity but also heightens your exposure to risk. In the CFMA’s 2021 survey, the average ratio was 1.4 (0.7 for smaller companies).
Working capital turnover (revenue ÷ working capital). This ratio indicates the amount of revenue generated by each dollar of working capital. As a rule, a higher number is better — though an extremely high ratio could raise a red flag that your working capital is stretched too thin. In the CFMA’s 2021 survey, average working capital turnover was 6.8 (4.4 for smaller companies).
Too often, contractors wait until equipment breaks down before repairing or servicing it. Monitoring the right KPIs and using data analytics can allow you to anticipate when maintenance or replacement parts will be needed, minimizing downtime and lost productivity.
For example, sensors embedded in some types of equipment can collect real-time data such as fuel usage, mileage, hours of operation, engine temperature and fluid levels. Tracking and acting on these data points allows you to perform “predictive maintenance” rather than react to breakdowns after they occur.
Get a checkup
Even a healthy construction business can benefit from regular KPI-based checkups. In fact, most financially sound companies get and stay that way by keeping up with the numbers. Ask your CPA for help.