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.
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
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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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!