Key Indicators for Managing Financial Health
For contractors, keeping a vigilant eye on financial metrics is crucial to maintain and improve profitability. These metrics provide insights into project performance, resource allocation and overall financial health. Below are the essential financial metrics that contractors should meticulously track.
Backlog
Definition: Backlog is the open pipeline for a contractor. The backlog indicates the amount of future revenue that is set to be generated from the contracts the contractor currently has in place.
Importance: A higher backlog balance indicates a healthy pipeline for future revenue. Contractors can look at several metrics relating to backlog to assess their financial health, one of which would be number of months in backlog (current backlog/annual revenue): This figure will give contractors a glance into where they are sitting with current work. For example, a good goal would be to maintain six months’ worth of revenue in backlog at a given time. Additionally, if the backlog number is significantly higher, it may be a sign work is delayed, and the contractor is potentially overextended.
Working Capital
Definition: Working capital is the difference between a company’s current assets and its current liabilities.
Importance: Construction projects often require substantial upfront costs relating to labor and materials. Sufficient working capital is needed to cover these expenses while awaiting payment from clients.
Gross profit margin
Definition: Gross profit margin is the percentage of revenue that exceeds the cost of goods sold (COGS). It reflects the efficiency of a contractor in managing project costs and generating revenue.
Importance: A higher gross profit margin indicates better control over direct costs and higher profitability. Tracking this metric helps contractors identify cost-saving opportunities and price their services appropriately. Looking at this metric on a job level aids contractors in identifying certain projects that are negatively impacting the overall gross profit margin of the company, which can help target project management concerns.
Overhead Ratio
Definition: The overhead ratio measures the proportion of indirect costs to direct costs or revenue.
Importance: A lower overhead ratio indicates efficient management of indirect costs. Contractors should aim to minimize overhead expenses to maximize profitability.
Bid-Hit Ratio
Definition: The bid-hit ratio compares the number of successful bids to the total number of bids submitted.
Importance: This metric helps contractors assess the effectiveness of their bidding strategies. A higher bid-hit ratio indicates better alignment with market demands and client expectations.
Conclusion
Tracking these financial metrics is essential for contractors to maintain profitability and achieve sustainable growth. By regularly monitoring and analyzing these key indicators, contractors can make informed decisions, optimize their operations, and enhance their financial performance. Effective financial management is the cornerstone of a successful contracting business, ensuring that projects are not only completed on time and within budget but also contribute positively to the company’s bottom line.
For more information on how financial metrics can help your contracting business, contact a member of the Schneider Downs Construction Industry Group.
About Schneider Downs Construction Services
Led by a diverse group of shareholders and managers, Schneider Downs provides strategic and practical solutions for our construction clients in all facets of their business. Our dedicated team of more than 350 professionals have a wide background of tax, accounting, technological and business experience in the region, specifically in Pittsburgh and Columbus.
To learn more, visit our Construction Industry Group page.
