Keeping Your Construction Company Financially Fit: The Top Financial KPIs You Should Monitor and WhyAug 14, 2023
As a construction CEO yourself, you know just how complex the business of building really is. And while it's easy to get caught up in the day-to-day challenges of managing your projects, ensuring your people are operating at peak-performance, and delivering your work on time and within budget, there's one thing that should always stay top of mind: your company's financial health.
Monitoring your financials is crucial to maintaining a healthy construction business, not just for its long-term viability, but because it's also a critical measure of your success. We've compiled a list of the top financial key performance indicators (KPIs) you should monitor on a regular basis to help you keep your construction company financially fit.
- Revenue Growth Rate
One of the most important KPIs to monitor is your company's revenue growth rate. This metric tracks the percentage increase or decrease in your company's revenue year-on-year, providing valuable insights into how well your company is performing.
From a financial perspective, revenue growth is essential to the sustainability of your business. By tracking it, you'll be able to course-correct any issues before they become too big, or even identify opportunities for growth. Monitoring your revenue growth rate can also help you spot any changes in the market, track customer preferences, and identify areas where you need to improve your business processes.
- Operating Margin
Operating margin is the percentage of revenue that remains after deducting a company's operating expenses. In simple terms, it's what the company earns after it has paid for all of its overheads. This metric is essential to monitor because it tells you how efficiently your company is running and how profitable you are.
Keeping an eye on your operating margin will help you identify areas where you can cut costs, streamline your operations, and maximize your profits. It's also a valuable metric to share with stakeholders to demonstrate your company's financial soundness.
- Days in Accounts Receivable
Days in Accounts Receivable (DAR) is the average number of days it takes for a client to pay an invoice. This metric is important because it affects your company's cash flow and liquidity. The longer it takes for a client to pay an invoice, the more challenging it is for your company to pay its bills on time, meet payroll, or keep up with expenses.
Monitoring your DAR can help you identify clients who are slow to pay, improve your invoicing processes, and tighten up your payment terms. Aim to keep your DAR as low as possible, ideally at 45 days or less, for a healthy cash flow and business liquidity.
- Gross Profit Margin
Gross profit margin is the percentage of revenue that remains after deducting the cost of goods sold (COGS). This metric is important to track because it evaluates your pricing, manufacturing and distribution strategies and measures how well you're managing your costs.
Monitoring your gross profit margin can help you spot any issues with the cost of goods sold, identify pricing strategies that aren't working, and improve your supply chain management. It's an especially useful metric for construction companies to monitor, as there can often be significant variances in margins depending on factors such as materials, labor, and subcontractors.
- Project Profitability
Finally, it's important to track profitability metrics on individual projects. This includes calculating profit margins, cash flow, and identifying the various costs and expenses associated with specific projects.
Tracking project profitability can help you balance your workload, estimate future projects more accurately, and measure how efficiently you're executing work on the job site. By breaking down the financial data within each project, you can get a more holistic view of your company's financial health, and gain insights you can use to enhance your operations and overall profitability.
Keeping your company financially healthy can be challenging, but with these top financial KPIs, you'll be better equipped to monitor your company's financial health, measure performance, and optimize your strategies. By tracking the revenue growth rate, operating margin, days in accounts receivable, gross profit margin, and project profitability, you'll have valuable insights to keep your construction business running smoothly and successfully. So, keep these critical KPIs top of mind, and stay on top of your financials to ensure your success!
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