Construction-related businesses are complex by nature. Many involved in the industry are intimidated by the complex numbers and wide range of key performance indicators (KPIs) that confront their business. Simplifying the numbers to create effective measures of production, sales, and operations success can help yield financial business success, construction industry consultant Shawn Van Dyke said at the 2019 International Builders' Show.
Simple total revenue per employee, sales closing rate, and average weekly billing metrics can help focus financial efforts and help project the health of remodeling and building businesses, Van Dyke said at his Spotlight session “3 Simple Numbers to Measure the Financial Success of Your Business.” The three metrics are relatively simple for businesses to put together and do not require in-depth analysis of finances, but can help inform businesses where they may be lagging behind or leaving profit on the table.
Revenue Per Employee
The revenue per employee figure helps focus production efficiency. Van Dyke cautioned that the metric is not a measure of profitability nor a means of evaluating individual performance. Instead, the metric allows companies to create historical trend lines for their companies and evaluate where the figure is relative to the past and project what it needs to be in the future to achieve greater profitability.
“Something simple can become very effective when you go out to your people—the number of employees—and you start asking them about their input,” Van Dyke said. “’We have a revenue per employee of $250,000 and that’s not high enough to generate a profit so we need to become more efficient. How do you think we can become more efficient?’ The problems inside your construction business, your employees have the answers to them.”
The revenue per employee figure can also inform hiring decisions, Van Dyke said, and give businesses a better idea of what the financial implications of a hire could be. It provides businesses with a way to analyze whether additional employees are needed to hit revenue targets.
Sales Closing Rate
A metric of sales that can inform the financial health of the business is the closing rate, which Van Dyke defines as the ratio between projects awarded and projects proposed. The relationship can be expanded to explore the ratio between the number of projects awarded and proposed—the quantity closing rate—as well as the total value of the projects awarded and proposed—the value closing rate.
“As you’re growing your construction business, you have to start saying no to certain projects,” Van Dyke said in relation to the quantity closing rate. “In general, if you’re above 50% on the quantity closing rate, you’re probably not charging enough and you need to be lower so you can maximize the amount per project.”
Van Dyke said the quantity ratio can predict the production schedule of a company, while the value closing rate can help predict revenue.
Average Weekly Billing
The average weekly billing metric, which is total revenue divided by the number of weeks in the year, provides businesses data to analyze operations. With projected target revenues, Van Dyke said the metric can be used to see if businesses are on target or if they are behind schedule.
“Uncontrolled growth can put you out of business and take all of your cash,” Van Dyke said. “You can be a profitable company and still go out of business if you don’t have any money. This [the average weekly billing metric] is a very good indication of some of those high level metrics [such as profit and loss].”
