As we approach year-end it’s helpful to do a deep dive analysis on your numbers.
What worked? What didn’t? What should you change?
To do this correctly you need to look beyond the typical sales and profit benchmarks.
Hidden Inefficiencies and Opportunities
I recommend using a more sophisticated set of KPIs (i.e. benchmarks) to uncover the hidden efficiencies and opportunities in your operations.
Can You Compare Your Benchmarks?
As you do your analysis it helps to compare your numbers with other firms.
Let me emphatically state that accurate benchmarking between companies is possible, it just takes some effort.
You need an apples-to-apples format, and everyone needs direction on how to navigate the format.
I have spent 16+ years fine tuning and testing my benchmarking tools. This allows us to put on our Financial Master Class (details here) with accurate data.
MY FAVORITE BENCHMARKS
First let’s get some basics out of the way:
- Sales vs goal (did our salespeople and marketing team do their job?)
- Revenue vs budget (did we manage the schedule effectively, did we reforecast timely?)
- Profit after depreciation (Did we budget for and hit a high enough profit)
- Overtime (were we staffed correctly?)
- Gross Margin (how effectively did we price and produce our work?)
- Direct Labor % (is our labor being used as efficiently? IS someone controlling costs?)
- Job Cost Trends (who had the best jobs? Who had the most fade?)
- Non-Billable % (it has to be budgeted, not just assumed)
Now onto a deeper dive.
Here are some of my favorite financial benchmarks
Net to Owner (combines the owner’s salary and perks with profit, for a true read that your management team can use.)
Gross Margins by Division – Net of Subs (is each division engineered and optimized to make money? )
Labor Mark Up (everyone talks about material mark-up, but have you looked at labor mark-up to double check your pricing?)
Return on Assets (It’s a big question: how effectively are you making use of all the assets under management’s disposal?)
Payroll as % of Revenue – net of materials and subs. (As you grow, are your payroll costs staying in line? A five year trend of this is eye opening, and for some of you it will be a bit scary.)
Return on Equity (is your business an overall good investment?)
Billable Hours & Throughput (Did you achieve your annual schedule (hours) needed to make money, and did you sell enough high-profit work (throughput) with that schedule?)
Days to Cash (who is managing your receivables, and are they doing a good job?)
There are also a bunch I love in sales and customer service, including:
Closing Ratio – after proposal is given (this tells you how well your salespeople did in screening and actually selling their proposals.)
I told a white lie when I said I had just 5 favorite benchmarks.
In order to financially engineer your business for an outstanding 2024, you have to uncover the myriad hidden weaknesses, while also exploiting your strengths.
It’s this “one-two punch” approach that will make you better, faster and stronger.
Your Challenge: Take The Time to Analyze With Your Team
In the old days you sailed through the year just by looking at the cash in your bank account. No more!
To steer towards a 20% net profit year, and 15% in commercial, you must dig deep as a team.
Look at 3-5 year trends, and identify a comprehensive list of improvements, you should end with a list of 20-40 actions big and small.
Note: A lot of companioes are now only looking at EBITDA (for valuation’s sake), but that is a mistake. You need both. I will explain in more detail in an upcoming podcast, and during our Financial Master Class.
P.S. Join Us for our 4th annual Financial Master Class – the early bird pricing ends in 10 days,
Bring your team (4 for 3 discount) and get everyone smarter, faster, more nimble. Email for details