How would it be to coach a team and know your team’s score but not your opponent’s? Most companies prepare their financials on a regular basis so they know their own score, but how do they compare to others in their industry? Benchmarking is an important tool to help you see how you stack up against your competition. Just like a coach will review their stats and see where they have strengths and weaknesses, a business owner should regularly do the same.
The Construction Financial Management Association (CFMA) recently released its Construction Industry Annual Financial Survey. The survey allows you to benchmark your financial information, as well as business practices and strategies, with your peers in the industry.
According to the survey results, margins remain thin for the industry. The average net margin before income taxes declined from 2.3% in 2012 to 2.2% in 2013.
Contract backlog continues to decrease since a five year high in 2011 of $99.5 million. Even though backlog remains short of the 2011 mark, it surpasses the five year average of $74.1 million. The following graph shows the average backlog reported for the past five years. Many contractors track their backlog in months of annual revenue. For 2013, the median months of backlog reported was 4.8 months compared to 6.4 months for 2012.
When measuring success, a coach will normally compare themselves against the best-of-the-best. When benchmarking your company, you should do the same. For Contractors, the Best in Class designation is equivalent to championship caliber sports teams. The 2013 CFMA Survey recognized the Best in Class contractors for their strong financial performance as the top 25% in profitability of their peer group. The Best in Class companies reported a net profit margin before income taxes of 5.6% for 2013 compared to the results for all companies, stated above, of 2.2%.
Best in Class status is calculated using five key indicators of financial health: Return on Assets, Return on Equity, Fixed Assets, Debt to Equity Ratio, Working Capital Turnover. The following chart shows how the Best in Class performed compared to the 492 total participants.
Not only should you benchmark against your competition, you should benchmark against yourself. Similar to the way a coach compares stats from game-to-game and season-to-season. Measure your performance against your previous months, quarters, and years.
Once you have completed your analysis of benchmarking data, don’t stop there. Like any good coach, it is important to take the next step and use the information to develop goals and a specific game plan to achieve the desired results for your team.
This article is a highlight of the data available in the survey. The survey also provides further breakdown by specific sectors of the construction industry, size of company, and region of the country. If you have any questions or would like additional information, please contact Andrea Strange, CPA at astrange@hsccpa.com.
