At the start of 2020, construction was projected to grow at 4.5 percent annually through the next several years. Now that every industry is facing a prolonged period of uncertainty, having access to accurate, up-to-date information is more critical than ever. When the economy picks up again, having visibility into staffing levels will be important, as well as understanding where growth can occur. Areas like renewable energy are expected to soar, while others—such as electric utilities—may see a decline.
With so much uncertainty on the horizon, everyone in the construction industry needs to be at the top of their game, especially in terms of finance and accounting. It’s a big effort, and it requires a clear understanding of financial performance based on the key indicators. Every company will incorporate different KPIs, but all of them will use these five:
Measured by taking revenues and subtracting things like taxes and expenses, net income is simply another word for profit. Since earning profit is the sole reason businesses exist, this is a metric that decision-makers need to have on their radar at all times. Following when, why, and to what degree the net income changes over time offers crucial insights into financial performance. Forecasting net income based on past performance can also help senior management plan future decisions around the company’s predicted financial strength.
Average Accounts Receivable Aging
Owing to high labor and overhead costs, construction companies need to perfectly understand their cash flow. That takes multiple metrics, including average accounts receivable aging: the average time between submitting an invoice and receiving the payment. Knowing this number suggests how much money will be on hand later, and changes in the age provide advanced warning of looming cash flow issues.
Monthly Overhead Burn Rate
Essentially a measure of your monthly spending, this metric reveals whether you can keep the doors open next month. It’s also an important indicator of how you’re managing costs and how those costs translate into revenue. People inside and outside finance can learn a lot from this metric, but the reason it’s in the top five is that it sends up red flags in advance of a cash flow crisis. For that reason alone, it deserves constant attention.
Though not strictly a financial metric, a company’s bonding capacity says a lot about its revenue-generating potential. Companies can’t pursue projects that exceed their capacity to secure bonds, which puts a hard cap on how much income they can make. Increasing the bond capacity takes time, so this number might not change a lot, but it still requires ongoing focus because it factors into so many strategic and financial decisions.
Multiple metrics reveal how many bids are in the pipeline: pending bids, business development meetings scheduled, active proposals with win probability, etc. In some form, all construction companies need to be looking forward and estimating future income and expenses. The whole point of tracking financial KPIs is to identify opportunities and obstacles early enough to react accordingly. Some metrics reveal what’s happening now or in the near future while others, like bid development, offer a glimpse into the long-term financial health of the company.
How you track metrics is just as important as what you choose to track. With financial reporting tools from insightsoftware, construction companies can effortlessly attend to these metrics, even getting real-time updates. Reporting becomes so easy, in fact, that you can follow a lot more than five metrics. Learn what else you should be tracking by downloading our ebook: Guide to the Right KPIs for the Modern CFO.