I know, you know, he knows, she knows, we know, they know: The market is tough! The remodeling industry has been flying high for quite a few years, but according to most economic forecasters, the current “dip” could last for a couple more years.
To stay airborne in this kind of environment, do what pilots do: use a dashboard designed to immediately alert you to changes in critical measurements. Here are four such measurements (there are three more in the online version of this article at www.remodelingmag.com).
Quick Ratio
Also known as the “Acid Test,” this ratio compares how much you have with how much you owe. The formula for the quick ratio is:
(Cash+Acct. Rec.)÷(Acct. Payable+Payroll)
“Payroll” includes all expensed wages, plus any withholdings, employer payroll taxes, contributions to 401(k) plans, etc. The ratio should be 1.0 or higher, indicating that for every dollar of debt, there is one dollar or more in cash or in bills that have been sent to clients who are expected to pay promptly.
Lead Conversion
This ratio measures your ability to drive good customers to your door and convert their interest into a signed contract. The formula is:
No. Qualified Leads ÷ No. Signed Contracts
Use a rolling 12-month total for both inputs (if you have a very large number of leads, you can use a shorter interval.) A design/build firm might be happy with a ratio of around 3.0 (one contract for every three good leads) because it is more selective about which leads it pursues. A trade contractor might be content with a lead conversion ration of 8.0 or more because it places bids on many more jobs. Use past numbers to determine your company’s historical baseline.
Break even
This formula tells you how much work you actually need to produce (not just sell) to cover job costs, all overhead, plus owner’s salary. This is critical information in times like these because a projected loss buys time to recast your overhead budget so that you end up in a better position. The formula is:
Overhead ÷ Gross Profit Margin
This simple equation only works if you have an accurate figure for overhead costs. Include owners’ salaries in overhead and note that the break-even formula does not take net profit into account. If you hope to earn a profit, you will need to produce proportionately more work.
Productivity
Field productivity tends to fall in uncertain times. This formula shows how efficiently field crews produce billable work:
Produced Volume ÷ (Total Field Hours ÷ Avg. Hours Per Employee)
Although there are 2,080 hours worth of eight-hour workdays in a year, after you subtract vacation time, company meetings, rainouts, and the like, the number is much lower. The example uses 1,800 hours, but you should substitute your company’s per-employee average.
Remodeling magazine’s productivity benchmark is between $250,000 and $325,000 (see Benchmark, July 1999 and July 2000). Yours might be different depending on how much work is done by trade contractors. Again, look at history to determine a baseline.
With these four ratios, you should be well equipped to survive the coming months. Good luck!
—Judith Miller is a Seattle-based remodeling business consultant and trainer specializing in accounting, finance, and computerization.
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