Business

Empower Your Employees and Profits With a Meaningful Metrics Strategy

Employing a straightforward strategy to manage your company's money and money goals is sometimes the best path to success.
By LeAnne Goode
May 10, 2024
Topics
Business

When managing a project, the last thing a team wants to worry about is accounting. 

And yet, the company can’t move forward with big decisions if they have outdated work-in-progress schedules and lagging financials. Outdated and inaccurate financials negatively affect bidding, the pipeline, staffing and profits. They prevent management from measuring meaningful metrics for business success.

How to turn it around? It requires a top-down approach. Leaders must insist on accurate and timely cost estimates on all projects. When project managers and supervisors understand that accounting is everyone’s concern, then it becomes a solid foundation for securing new work, purchasing equipment, retaining employees and giving out bonuses. That’s meaningful.

But first, owners and the management team need to be clear about their goals: Do they want to improve productivity? Do they want to improve safety? Do they want to avoid layoffs or improve margins on jobs? Maybe it’s all of the above. These goals determine the best metrics to track.

ESTABLISH MONTHLY CLOSE DEADLINES

Once management is clear on the goals they want to achieve for the business, they should share them with field leaders and the accounting team. To achieve these goals, stress the importance of accurate, monthly tie-downs for the following:

  • Cash, accounts receivable, accounts payable
  • Large accruals and notes payable
  • Progress schedule for under-/over-billing adjustments

When these items are updated at an agreed-upon time each month, the accounting team can accurately identify differences between amounts billed and amounts earned per project as well as accurate costs to complete. A WIP schedule that is updated monthly offers a more accurate picture of job status, costs and earnings. It also heads off an all-too-common problem of unsubmitted or outstanding vendor invoices. 

With monthly under-/over-billings adjustments, owners can ultimately improve bidding, keep the pipeline full and plan for crew scheduling. Timely financials built into the culture also support proactive business decisions based on meaningful key performance indicators.

KPIs COMMON TO CONSTRUCTION

Timely and accurate accounting leads to meaningful key performance indicators. Over time, management can identify trends such as productivity, cost controls and profits by project type, owner or even project manager. Accurate data also helps management plan for significant equipment purchases or strategic M&A.

There are several KPIs common to the construction industry, but these may or may not be important to your company. There is no magic ratio; it depends on your business goal(s).

  • Return on Equity: This is the ratio of net income before taxes compared to total net worth. It indicates returns for owners (for capital invested in the company).
  • Days in Accounts Receivable: Excluding retainage and allowance for doubtful accounts, this is the ratio of accounts receivable compared to revenue. A lower ratio means more liquidity while a high ratio can indicate a drain on cash flow.
  • Current Ratio: This is current assets compared to current liabilities. It indicates to what extent assets are available to cover current liabilities.
  • Quick Ratio: A quick ratio focuses on liquidity, comparing available cash plus short-term investments and net receivables against current liabilities.
  • Cash Ratio: This ratio focuses just on cash-on-hand to satisfy current liabilities. A high cash ratio may indicate under utilization of cash while a low cash ratio may indicate cash flow issues. 
  • Gross Margin: This is revenue minus the direct costs of doing business.
  • Net Margin: This is sales revenue after covering all costs, including interest and taxes.

After determining significant KPIs, accounting can report them alongside the financials, making it easier for management to track trends per project or for business health. The accounting team can also create a dashboard of meaningful metrics in a format that is easy to view monthly or quarterly. This work could also be outsourced as strategic financial analysis by a CPA.

PERFORM A GAIN/FADE ANALYSIS

One big opportunity with consistent measurement of KPIs is a gain/fade analysis. This can be done to identify changes in gross profit from one point in time to another. Whether done monthly, quarterly or at the end of a contract, it helps identify areas of risk in estimating or project type where the firm may need to build in contingencies or offer additional team training. It may also identify best practices in crew management and cost controls to support higher margins.

In some cases, management may discover that, with a gain/fade analysis, contingencies were built where the company didn’t need them, but they may also discover which industries or clients are most compatible with their business goals. This helps with planning for future niche expansion where the business profits most.

Planning can’t happen if the financials are outdated or inaccurate. When management demonstrates the importance of meaningful metrics for future bidding, staffing and even bonus calculations, then team members will be more willing to put in the extra work. Help them see that there is no downside to keeping an accurate WIP schedule but plenty of upside for company growth and career advancement.

by LeAnne Goode
LeAnne Goode, CPA, MBA is a partner with Anglin Reichmann Armstrong in Huntsville, AL, and helps to lead the firm’s construction group. Anglin is a member of ABC of North Alabama, ABC of Central Florida and ABC of North Florida. Reach LeAnne at [email protected].

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