Spring is here! Hopefully, your phones are ringing. As work picks up for the season (depending on your seasonality), all the planning you’ve been doing will pay off. But as work picks up, so do the number of things that have to get done. Something’s gotta give. So, how can you stay focused on the Big Rocks, including financials?
Earlier this year we wrote about how you can make your budget come alive during the year. Now, let’s discuss more specific numbers you can focus on as the busy-ness picks up. We call these numbers “KPI’s,” or Key Performance Indicators. I’ve purposely left out Revenue, Gross Profit %, and Overhead. Those are numbers you’ll review monthly. What I’m discussing here are daily and weekly items that can be checked quickly.
I’ve highlighted my top 5 metrics, but there are lots more to choose from. And by no means are these perfect. They’re just my favorite. When choosing your own, try to pick no more than 5-6 total. The goal is to give you a quick snap-shot of where your company stands. If something is off, you can dig into the details. If the numbers are on, keep truckin’.
- Labor Hours per Week (Payroll Hours for Field Employees). As service companies, what we sell are Hours. Some of you paint, some build, some landscape, some pave and more. But all of it is done through time. How many hours will you need each week to hit your revenue goals? Some companies go a step further, watching Labor Hours per Day. Based on the budget you did, this number ought to change through the year based on seasonality. If you’re not hitting the mark, consider adding field employees and/or adapting your sales strategy.
- Revenue per Hour (Revenue divided by Field Payroll Hours). If you’re achieving the hours you need, the next question is, “Are those hours profitable?” In other words, are jobs coming in happy and under? Rev/hr helps you understand profitability. If you are hitting your goal, there will be enough dollars left over for Overhead and Profit. As demand grows in the season, are you achieving the higher Rev/Hr you’ll need to be profitable? If, not what might you do to improve?
- Average Labor Wage (Field Payroll divided by Field Payroll Hours). This metric gets at having balanced crews, and a balanced field overall. Incorporating lower paid apprentices and laborers can do wonders for your profitability. It allows the experienced members of your team to stay focused on complicated tasks, improving quality. What’s more, bringing up younger and/or less experienced employees is the foundation of your company’s future. You will need to decide what “balanced” means for your company. We highly recommend asking yourself if you’re making the most of this opportunity.
- Current Ratio (Current Assets divided by Current Liabilities). This metric comes from the Balance Sheet and measures your company’s ability to pay short-term payables. (Short-term would include payroll, monthly bills, materials; basically anything due within 12 months.). A score of less than 1 would indicate you’re having trouble paying bills. A score greater than 1 would indicate paying bills is getting easier. Generally, among trade industries, I’ve seen a score of 1.5 be the starting point for leftover cash starting to build in the bank account. Squeeze every penny until you’re at 1.5 or better. When you do decide to spend some money, make sure it does not push your score below 1.5 for too long.
- Days Receivables (Receivables divided by Revenue per Day). The question here is, “Are you converting your invoices (ie- completed jobs) into cash fast enough?” The higher your A/R, the longer you will likely need to rely on other sources of funding, like Credit Cards and Line of Credit. For residential work, we typically benchmark a score of 7 days or less. For commercial type work, the benchmark is 30-45 days. If your score goes higher than these benchmarks, it’s time to dig into who owes you money and why. For example, what percent of receivables are great than 90 days? What can you do to go after them?
The key here is to pick KPI’s that help you feel confident and be committed to action. Pick numbers that speak to you. If you’d like to learn more about these numbers, please feel free to contact me directly at email@example.com… Corona’s and KPI’s make for a great summer evening! You can also check out www.Investopedia.com for these and many more great KPI’s.
What KPI’s are you watching? Join the discussion in our LinkedIn Group– Guiding Small Businesses to New Heights