By Mike Essenmacher, director of accounting and assurance, Barnes Wendling

Tracking your construction company’s financial metrics provides a way to measure its performance against others in your industry. These metrics measure where you may be lagging behind the competition and why your company could be losing money.

Start your benchmarking analysis by reviewing net income and key components like payroll and benefits against prior years. Net income is an excellent measure of your company’s efficiency and performance, and within performance ratios, other ratios for overhead burden, payroll and material costs can be measured. Finally, review your cash flow by measuring how fast your company collects receivables before paying the funds back out as expenses.

The company’s borrowing capacity allows you to measure its capacity to finance new work, which reflects how efficiently the company has used post profits. Borrowing capacity is determined by working with your lending agency to ascertain the maximum amount it would be willing to lend your company, a figure that is determined by analyzing factors including debt-to-equity ration, the backlog of jobs and projects on which your company is currently working and the leverage ratio of the company.

Bonding capacity is another key metric. This amount, determined by your insurance agency, is the maximum figure for which it will insure your projects. Bonding capacity can be measured as a multiple of available equity or working capital.

Once you have benchmarking measurements in place, compare your metrics against the performances of other companies in your industry. For public companies, financial and performance information is readily available online through published quarterly reports. For private companies that don’t have to report their financial information to the SEC, finding their key metrics can be more difficult, but online services are available through your CPA or data collection agencies to measure these ratios.

To get that information, relationships are key. In a business like construction, you get to know your competitors quite well, and short discussions with them often yield telling information about where they stand financially. But if you haven’t developed those types of relationships within the industry, research groups publish financial information for companies of all kinds, data that based primarily on tax returns filed.

Once you have your own metrics in hand and have gathered information about other companies in the industry for comparison, you can begin to identify trends related to expenses and efficiency. This data will also allow you to identify areas of waste and inefficiency and take steps to correct them. Finally, these metrics will help you identify best practices within the industry and take steps to implement them in your own company.

Benchmarking your construction company will show how you stack up against others in your industry and areas in which you might need to do some work, allowing you to formulate a plan of action and ensuring that your company continues to grow and profit.

For more information about metrics for measuring the success of your business, contact Barnes Wendling at (800) 369-6375 or www.barneswendling.com.