Stay On Top Of Your Numbers
In this issue of the Executive Report, we will continue our series on “What Does It Take To Be Successful?” Throughout 2018, this series will take a look at core attributes of successful home improvement contractors and, in particular, successful residential metal roofing contractors. In previous issues, we have looked at Business Systemization, Professionalism, Commitment, and Leadership. In this issue, we will look at key numbers and ratios that successful contractors track and use in guiding their businesses.
Drucker was famous for saying, amongst other things, “You can’t manage what you don’t measure.” While his quote has sometimes been criticized for looking more backward that forward, good business leaders will always do a great deal of looking backward because, good or bad, the numbers and experiences from their past provide context and guidance for their preferred future. In other words, if you do not know your past and your past has been lackluster, you will be doomed to repeat it. On the other hand, if you don’t know your past and your past has been stellar, how will you know when your future is missing the mark?
While this article will not give you the numbers and ratios that are best for your business at this particular point in time, I’d be happy to talk with you and discuss typical numbers for successful contractors. This article, though, will identify the numbers and ratios that are important for all successful contractors to know and to respond to.
Total Number of Leads. The volume of business you want will dictate the number of leads you need. You can work backward from your closing and demo rates to determine how many leads you need to achieve a certain amount of business.
Lead Quantity By Source. Tracking leads by source, as well as your closing ratio on those leads, will guide your marketing expenditures. Never let a lead come into your organization without documenting how they heard about you. Ultimately, this number also allows you to track your very critical Lead Cost By Source.
Cost Per Lead. This will be your average cost per lead across all of your lead sources. Knowing this number then allows you to determine which sources have costs above or below the average. You will not necessarily just weed out your more expensive leads because, with further analysis, your more expensive leads may have higher close ratios which is a good thing. But the Cost Per Lead will, again, help guide your marketing dollars.
Marketing Cost Per Sale. This is very important to know. In today’s age of increasing marketing costs, you need to know your marketing cost per sale, both as an average and as a percentage of the contract price. This number is critical to determining your pricing strategy. If you have calculated how many leads you need to generate, then you must know how much to build into each sales contract to cover the marketing required to make that sale.
Job Costing. It is critical to track your costs for materials and direct labor for every job your company does. Many contractors use a “folder system” for doing this but better accounting software will allow you to track this electronically, giving you greater flexibility for analysis down the road.
Overhead. This number must be looked at monthly – what did it cost you to “keep the lights on” so to speak. This will include utilities, administrative help, rent, insurances, licensing costs, etc. Overhead is normally tracked as an aggregate rather than “per job” but, at least monthly, you must analyze your Overhead as a percent of sales in order to help you with your pricing strategy.
Capital Expenditures. Your Cap Ex number is what you spend on equipment, tools, etc. that the IRS will allow you to depreciate over time. While Cap Ex costs paid for by cash will not be figured into your Overhead number, they must be tracked because they have a major impact on cash flow. A saying I was taught years ago was “Cash Is King And There Ain’t No Queen” – this basic premise is very important to remember in business management. If you cover your Cap Ex with financing, then your monthly debt coverage can be looked at as part of your Overhead to help you with financial analysis and planning.
Gross Profit Percentage. Gross profit is the number after you subtract materials and direct labor from your top line sales number. Additional expenses to be pulled out of this number include overhead and owner’s profit. Many contractors far under-estimate what their Gross Profit Percentage needs to be, leaving themselves woefully short when it comes to covering overhead. This is probably the biggest mistake that prompts contractors to get in trouble with the IRS and to also be unable to pay their suppliers.
Net Profit. This is your bottom line number after materials, direct labor, and overhead. Keep in mind that you will also have income taxes come out of this number.
Quick Ratio. This ratio is your Accounts Receivable divided by your Current Liabilities. This number helps you to know whether, in the coming weeks and months, you have enough money coming in to pay your bills. If this number is not significantly more than 1, you will have problems.
Current Ratio. This ratio is your Current Assets divided by your Current Liabilities. This number looks at a “liquidation value” for your company. If this number grows to be too large, you will likely want to remove some money from the organization in order to protect that money in the event of a lawsuit against your company.
Closing Ratio. To give you the best picture of your sales success, this must be analyzed “Per Lead,” “Per Issued Lead,” and “Per Demo”. It is critical to watch these numbers on a regular basis, and to also break them down by Sales Person and even by Lead Source.
Customer Satisfaction. Many companies are using outside services now such as Guild Quality to help them measure Customer Satisfaction. This is something, though, that you must track. If Customer Satisfaction begins to slip, you must be aware of it and be able to respond.
Monthly Financial Statements. Utilizing basic accounting software will allow you to develop monthly financial statements. This is critical of course should you ever need to obtain bank financing for anything but, above that, operating without monthly financial reports means you’re “flying blind” and very unlikely to notice and be able to respond to any negative trends in your business. Beyond this, successful contractors will also have an Annual Audit or at least an Annual Review performed by an outside CPA firm.
Again, I will be happy to discuss specific suggested or benchmark numbers with you if you wish but I do want to refer you to two organizations that you may want to consider joining as they both work a great deal with helping contractors benchmark and compare their numbers. Please check out the following associations that many contractors find to be very helpful.
As always, thank you for being a loyal reader of the Residential Metal Roofing Executive Report. Please feel free to contact me anytime to talk about what’s working well in your business, and also those areas where you may feel that improvement is necessary.