Are you running your construction business, and you’re not quite sure about the key figures for your business? Or are you glazing over when you talk to your accountant?
Follow my video or read below, and I’ll explain the key numbers I think you should concentrate on that will help your construction business to be a success.
Gross Profit
The most important number in construction businesses, where they win and lose, is gross profit. Gross Profit is where you take your income less your direct costs.
Direct costs can be materials, labour, and other direct costs like travel that you need to spend to get the job done.
In certain industries, the gross profit will average slightly higher and slightly lower. But the key to getting this absolutely nailed will determine whether your construction business is a success or not.
Debtor Days
This is going to impact cash flow massively; in layman’s terms, debtor days mean a calculation or where you work out how many days it takes for your customers to pay you who are paying you on credit terms.
How to work out debtor days?
Debtor days are calculated as follows:
Debtor days = (accounts receivable or debtors/annual credit sales) * 365 days.
Usually, you can get this calculated by your accounting software.
Are you monitoring debtor days within your business?
Have you got a complete handle on it, or are your customers taking you for a ride by having your money in their bank account instead of yours?
Net Profit Margin
When you look at your profit and loss account or income statement, you’re looking at what profit you have earned for the period.
That could be a month, a quarter, or a 12-month basis; your net profit margin is if you take all of your income less all of your direct costs less all of your overheads.
That final figure will be what profit you are owed as a business and is the true result of what you have done for that period. How often do you manage yours? And how well are you performing?
Wor In Progress Days (WIP)
This is a bit more complicated but also important in your business.
WIP is basically looking at how many days it takes from when you first buy the materials to when you’re physically invoicing them. So, you need to look at the cycle that you’ve got within your business.
This can be quite small if you’re doing a small construction project. But if you’re doing a bigger project where you’re doing staged payments, Work in Progress days could be anywhere from 20 days to over a month.
So, do you know how long the work-in-progress days are within your business? Because you have to fund this or you need to have the credit terms, where your suppliers are funding this for you.
You need the materials, and if you are asked to pay it upfront, you need the cash in the bank to be able to pay for it.
What are the Work in Progress days for your business, and how well are you managing yours?
Lock-Up
This is a sum of Debtor Days and Work in Progress days, less creditor days.
Creditor days are how long you get credit with your suppliers.
Your total lock up is looking to define the start of the job to the finish of a job. How many days have you got locked up within your construction business?
These vary from company to company and construction company size, but you should have a complete handle on the lockup days within your construction business.
Runway
What is the runway in your business?
The runway is how much cash you have got in your business to fund it without any extra income.
If you took all of your costs within your business and you looked at a monthly basis, how much cash have you got in your business that could fund that?
If any of your customers went bust or you had some downturns, you took on a bigger project, which has an effect on the cash flow; how much could you fund within your business if it wasn’t getting the extra income?
What runway have you got in your business that would help support it if it went through a lean time?
There might be some other ratios that are really important to your business or that are linked directly to your current goal that you’re working towards. But these ratios, I believe, are fundamental, and the more you nail them, the more successful your business will become.
If you have any questions or you need further help from me, please feel free to click below and book a free discovery call with me.
We can arrange a Zoom or a telephone call, I can take any questions you have on board, and I’ll promise there’ll be no pushy sales pitch.
