Are you about to start a construction business? here are the 10 best entrepreneur performance metrics you can use to measure your growth rate.
KPIs are very important and useful for almost all types of businesses. This is because they can monitor their profitability and efficiency at the same time. As an entrepreneur it is very important to use KPIs to be able to identify best practices and be successful in your business.
If you intend to get the most out of your construction project and your business as a whole, you should only use the best KPIs. It is common knowledge that running a business is not a walk in the park. Indeed, you will constantly be faced with unprecedented pressure that can come from your own business as well as other external factors.
In the latter case, it can include profit margins, ever-changing technology, expectations and a shrinking workforce. As an entrepreneur, you need to follow best practices for the best results. Because by doing so, you can increase your profits and reduce the risk you may face in the future.
Why are construction KPIs necessary?
The construction industry faces even more challenges and technical difficulties than your average business. In fact, more than 10,000 construction companies collapse every year and billions of dollars have been lost since 2098. There is no need to panic, however, because if you have the best KPIs, you can certainly be successful here. .
Experts in the field have concluded that for an entrepreneur to be successful, they must be able to adjust their business by aligning processes, people, and technology so that they can produce results above the industry average. The construction industry has already adopted key performance indicators that can indicate the overall health of a business.
If a contractor can track, analyze, and interpret the KPIs they’ve collected, the construction company can create long-term sustainability and achieve short-term financial goals.
KPIs can be defined as KPIs that indicate whether a business is performing as expected in a plan. The “key” part of the acronym indicates the priority actions. The “performance” part of the acronym refers to the way your business operates or behaves. The indicator aspect is usually quantitative data such as numbers or percentages that give a quick picture of a condition and its favorable or unfavorable state.
Here are some key performance indicators that will provide insight into the health and performance of the business. Remember, you shouldn’t look at KPIs in isolation, but rather they should be looked at together to get the full picture.
5 best entrepreneurial KPIs to know
1. Profitability: A construction company generally derives its profits from two sources: operating profit comes directly from the construction activities of your company, while non-operating profit comes from independent opportunities such as improvement in management. cash flow, savings from self-insurance programs, and income from other sources. profit centers.
There are three main key performance indicators to measure profitability:
- Margin Gross profit: The margin gross is calculated by subtracting your direct labor costs from your income divided by revenue, is to say that (income – direct labor costs) / income. The number obtained from this calculation indicates the percentage of revenue that is not paid as direct costs (cost of sales).
Gross margin is a very important metric that can be used in business planning because it shows how many pennies of gross margin can be earned for every dollar of future sales. The higher, the better (the business is more efficient.)
- Margin Net Profit : Net profit margin is calculated by subtracting overhead gross profit and dividing by what is (gross profit – indirect costs) / income. It is an important indicator. In fact, over time this is one of the most important numbers you should keep in mind.
It measures how many cents a business earns for every dollar. it sells. Keep a close eye on industry competitors – this is a very important number when forecasting, and the higher the better.
- Return on equity : It is calculated by dividing equity by net income (i.e. net profit / equity). This metric shows the return on equity returned each year. This is a vital statistic from the perspective of the shareholders of the company, again, the higher the return the better.
2. Cash Flow : Money is the lifeline of all businesses. You will need the money to pay your staff, pay for materials and supplies, reimburse subcontractors, and cover overhead costs, while meeting the liquidity needs of creditors and guarantors. A general indicator of cash flow is the period of demand for cash. This is due to three balance sheet accounts: receivables, payables and offsetting / underutilization:
- Cash Demand Period: This can be obtained by subtracting the average number of days to pay lenders from the average number of days required to fund the transaction i.e. (average days needed for fund transactions – average days to pay creditors). Basically, it’s the difference between when you get paid for work and when you pay your creditors.
- Days in accounts receivable : this figure is derived from the formula 365 / (Revenue / accounts receivable). High performing contractors alleviate this problem by carefully managing customer relationships and collections. This number reflects the average time between credit sales and payment receipts. This is important to maintain positive liquidity. The lower the better.
- Credit days: this figure is derived from the formula; 365 / (Direct cost / Accounts payable). By using your trade credit wisely, you can stay flexible. This ratio shows the average number of days between the purchase of materials and labor, as well as their payment. This is a rough measure of how well the business meets its payment obligations. The lower the better.
- On Billings / Under-Billings: This metric is obtained by subtracting earned billing income, then dividing the result by earned income. Those. (Billing – Earned Income) / Earned Income. Aggressive billing practices can help reduce the underestimation of work performed and encourage a reasonable overpayment.
3. Liquidity: This indicator is designed to measure the ability of the company to meet its short-term obligations. They are particularly important for your financial partners and your lenders.
- Current Ratio : It is determined by dividing your current assets by your current liabilities. It seeks to compare the availability of current assets to meet current liabilities and, as a rule, this indicator measures the overall liquidity position of the company. It is certainly not an ideal measure, but it is a good thing.
- Rotation of working capital : it is obtained by the formula; Income / (Current assets – Current liabilities). Working capital measures the amount of money a business has at its disposal that can be invested in operations to generate more income. The working capital turnover shows how actively these funds are used to generate income.
4. Leverage : Your company’s leverage metrics tend to have a direct impact on your business’ risk profile, as well as its ability to repay debts and seize new opportunities.
- Debt to equity : This is obtained by dividing your total debt by equity. The debt to equity ratio is one of the most important ratios when considering your KPIs. This measures the level of debt of your business. A higher ratio creates additional risk. Usually, a ratio of 3.0 or less is desirable.
- Income to equity : This is determined by dividing your income by the owner’s equity . A high ratio means you have less flexibility to cover design losses.
5. Forecasts: If you want to be successful as an entrepreneur, you must be able to closely monitor development work and project sales and revenue after at least a year.
- Stock backlog : This is obtained by dividing the backlog by equity. There must be a healthy balance. If you have too little backlog your business will stumble, and if you have too much backlog you will certainly be overwhelmed.
Other examples of key performance indicators for the construction sector include:
- Number of accidents
- Number of accidents per supplier
- Actual working days vs. available working days
- Actual and reference cash balance
- Changes to customer orders
- Changes to orders Project manager
- Customer satisfaction Criteria defined by the customer
- Standard product criteria for customer satisfaction
- Standard criteria for customer satisfaction service
- Construction cost
- Build a provisional cost
- Construction of expected value (customer change orders)
- Predictability of costs; Construction (project manager change orders)
- Design cost predictability
- Cost predictability Design and construction costs to eliminate defects
- Client satisfaction
- The relationship between daily project completion and actual and benchmarks
- fatal accidents
- interest coverage (business)
- actual and base labor costs
- labor cost compared to project deadlines
- Liability ratio (per asset) when comparing current and completed indicators
- Number of faults
- Unpaid money (draft)
- Percentage of equipment downtime
- Percentage of inactive work
- Percentage of unfulfilled tasks by project duration
- Percentage of unapproved change orders
- Performance (company)
- Profit margin Actual and benchmark profitability by project duration
- predictability of profit (project)
- profitability (business)
- quality issues in stock for use
- quality problems at the end of the waiting period
- Value added ratio (company)
- Repeat business (business)
- Reported accidents (including accidents)
- Reported accidents (non-fatal)
- Return on invested capital (company)
- Return on investment (client)
- Return of added value (company)
- Time to build
- Build predictability over time
- Build predictability over time (customer change orders)
- Build predictability over time (project manager change orders)
Here are the types of data that these KPIs can examine:
4 Ways: KPIs Can Help Your Construction Business
and. Safety: It is clear that a safer construction site comes with less risk and, therefore, lower long-term costs. Whenever security is compromised on your site, you can waste your valuable time and money fixing it. Additionally, security incidents can result in higher insurance premiums.
Therefore, knowing and understanding your security clearance is essential to lowering your costs and keeping your workforce productive.
b. Quality: Having a good understanding of the quality of your project will help you reduce the need for a job change and ultimately save you time and money. So, tracking quality metrics is a surefire way to stay on budget and on schedule.
The following construction KPIs will help your team maintain a high level of quality: number of defects, number of defects caused by manufacturing, defect repair time, number of on-site inspections performed, ratio of successful inspections to total inspections, total cost of rework, customer satisfaction. internal customer satisfaction
vs. Performance: Performance metrics can guarantee the performance of a project. Calculating the time and effort spent on a construction project allows teams to customize and allocate additional resources or tools to areas where they are needed most to achieve project goals.
Here are some key performance indicators related to construction metrics: waste / recycling at work, average revenue per hour worked, percentage of equipment downtime, percentage of labor downtime
d) Employees: It is very important to track your employee’s performance, measure their level of development and level of satisfaction in order to get the most out of them and your design. Invested and happy employees will be able to work more efficiently in the long run and contribute more to the bottom line.
In addition, staff turnover can result in significant costs for contractors, thereby reducing those costs. can save teams enormously. The following concept Key performance indicators are critical to employee retention: employee satisfaction, percentage of training completion, employee turnover rate
In conclusion, it is very important that the metrics are timely and relevant to the business as they are communicated early on. part of the business can help you and your staff avoid problems and secure great opportunities instead.
You need to be prepared for an ongoing team effort to improve your KPIs so that they are as useful, relevant and up to date as possible. This means that you will need to get involved in the discussion and adaptation, including digital change, on time.
It’s good to note that when looking at KPIs for construction, you shouldn’t just focus on financials.
While you need to keep a close eye on finances, adding new construction KPIs, which relate to safety, quality, productivity and people, is very important to understanding the full history of construction. your project. Over time, this will allow you to better control costs, plan and increase the bottom line of your business.
You need to track your KPIs from time to time to spot patterns. It is recommended that you measure certain metrics on a monthly basis, especially when you change your strategy, in order to know in advance whether you are gaining or losing positions.