Are you struggling with your businesses because you don’t understand what drives it?
Every
business focuses on making sales, paying the bills, and hopefully making a
profit.
However,
there are other financial and performance measurements that can provide early
warning signals and detailed avenues to greater success.
At this
point, you may be asking …
What are
business metrics?
They are a
unit or units of measure to gauge and detail a company’s performance and provide
the company’s management with standards of improvement.
For example.
You may
‘think’ it would be a great idea to hire a new employee. Maybe, you think it
might make things easier for you, or grow your business. The true answer is,
how do you know? Can you prove it’s in your best interests?
It is NOT
what you ‘think’ is best, it is what you can justify within your exiting
capabilities and capacities of your business.
In my Golden Hard Hat Mentoring Program, I show owners of construction
businesses how to measure, track, analyze and justify their business metrics.
In hiring people, we use the program’s distribution of time to develop the
metrics for each position within the company. Based on the strategic business
plan we have developed together, and the existing performance of the company,
we can clearly justify when it is required by performance for new hires,
thereby eliminating a top heavy business.
Another
example that I see so often, is the ‘thinking’ of which work is most profitable
for the business. Unfortunately, for most owners, this is nothing more than a
thought based on emotions. Remember, we want to measure, track, analyze and
justify. To do that, we use the program’s Job Characteristic Report to show us,
based on our specific parameters, type of work, or owner that provides us with
the highest return for our efforts, thereby eliminating that work or owner who
hurts our bottom-line performance.
Even one
more element is understanding your pipeline and backlog metric. As we all know
backlog is the amount of work you have in the work process at various degrees
of completion. Your pipeline is the amount of work you expect to funnel into
your backlog through your marketing, lead capture and capture rate of the leads
into signed contracts. Based on your turnover metric, we can calculate your
maximum and minimum backlog you should have at any given time.
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The use of
business metrics, including the measuring, tracking, analyzing, and justifying
help keep the business on its target, and within the capabilities and
capacities of the business. As in all things, it is critical to the success of
the business to know the right parameters – and then to know how to use them.
Measuring with the wrong metrics can do more damage than good.
Here are
five easy tips:
1.
Understand and know your businesses capabilities and capacities. I hate to say this but I see too
many contractors get themselves into trouble because they do not understand
their capability and capacity. You only have so much time, money, employees,
equipment, knowledge and experience. Use it wisely.
2.
Understand measure, track, analyze and justify. Every element of your business
should be exposed to this concept. Accountability is fundamental to effective
management and decision making.
3.
Determine the correct metrics. You need to determine the correct
metrics, and then make sure you fully understand them and have the proper tools
and information for measurement. Choose your metrics that best fit what matters
to your strategic business goal, from which individual objectives are created.
4.
Avoid the pitfall of ambiguity. Your metrics must be extremely clear. A broad goal
like ‘increase sales” can leave everyone with different ideas, thereby
producing failure. Your metrics should be so clear that an outside person could
come in and check whether the objective has been met. Clarity produces
certainty.
5.
Invest in the knowledge, help and tools that deliver. To make this work for you, you need a
working knowledge and real-time feedback. In the Golden Hard Hat Mentoring Program we provide owners of contracting
businesses, the knowledge, resources and spreadsheets that feed the vital
information to the owner via dashboards that allow them to quickly view and
analyze its performance.
Here is an example of a dashboard that show the financial and
employee metrics to do its
yearly volume:
From this snapshot, we can see the following metrics from a fictitious
company we will name, Your Construction Company.
The company plans to do $1,000,000 in volume at a markup rate
of 1.45, and produce a bottom-line of $85,000 after paying its owner a
reasonable salary. The company will need a capital reserve of $152,500 in
either a line of credit or cash, or a combination of the both to properly fund
its goal.
It collects on its receivables every two months, and it takes
the company approximately 150 days to complete its average project.
The maximum backlog amount it can’t exceed is $200,000 and
its minimum backlog amount in cannot go under in order to maintain its goal is
$145,161.
As long as the company controls its expenditures and reaches
its goals in all areas, its break-even volume is $725,806.
Based on its capture rate, the company will have to bid
approximately $14,285,714 of new work in order to produce its desired volume of
one million. This metric indicates that either estimating or the companies
target market may have to be reviewed.
According to its time management requirements, it has the
correct number of estimators, and project managers. It has an excess in
salespersons which indicate that with proper modifications in its sales people
it could increase sales.
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Talk to Henry
To schedule a no-obligation conversation with Henry Goudreau, "America's #1 Business-Building resource for Contractors," click here!
Let us help you build a BETTER, more PROFITABLE, more ORGANIZED construction business.
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Keep in mind that you will need to reevaluate and adjust your
metrics as your business priorities change. Fortunately, this program shows you
how to accomplish that. Such knowledge is extremely helpful in making every
effort to achieve what you set out in your strategic plan, even if your targets
were off.
Unfortunately, too many owners of construction business don’t
always recognize what makes their businesses work thereby stunting growth,
profitability, and the freedom they desire in their lifestyle. When you invest
time and thought into setting, monitoring, sharing, and refining your metrics,
you’ll be amazed at how much more in tune you are to the state of your
business, and how much more easily you can make the critical decisions that can
catapult your business’ success.
Remember, your business metrics is what drives your business to success!
