The following content is sponsored by Eide Bailly.
Benchmarking has always been a best practice for businesses and organizations. Identifying and analyzing metrics that are important to your construction operation and comparing them to peers and those in your industry allows you to craft realistic goals, maintain team accountability, and plan for the future.
Defining What Success Looks Like
The significance of identifying what success looks like first cannot be overstated. Clarity of purpose and mission is critical to determine measurements for success. Without an understanding of your overarching goals, it will be difficult to evaluate and tweak your metrics. It also takes collaboration — both within your leadership team and externally with trusted advisors. In a time of uncertainty, it’s important to have people who challenge you to think differently and to question your goals and metrics for success. A trusted business advisor should be able to have a strategic conversation with you and give you constructive feedback on your proposed strategies.
Understanding Your Target Market
Success is also contingent on understanding who your product or service is for and addressing the problems they face.
Having a clearly defined, reasonably sized target market can allow your business to put time and effort into those who are interested in the business, especially during a time when many are looking at cost containment strategies. Without having a clear picture of who your target market is, you may be wasting time, money, and energy on the wrong people — people who won’t even think about buying your product.
The Importance of KPIs
Once you have identified what success looks like and have a thorough understanding of your target market, you can begin to identify key performance indicators (KPIs). KPIs allow you to quantify what success means to your business. They are measurable, so you can track what you’re currently doing and what action you should or should not take.
Organizations of all kinds use KPIs to evaluate their performance across all levels of the organization. This includes organization wide, individual project, activity, product line, location, and more. Doing so helps organizations determine next steps to improve or grow. It also helps teams understand and work toward strategic goals.
Ways KPIs Can Benefit Your Business
Ensure Everyone’s on the Same Page
KPIs give definition to where your organization is going. Defining these metrics and communicating them to your team gives an understanding of the company’s vision and direction. More than ever, communicating outcomes and measurements with your team will be a critical component to your business strategy.
Hold People Accountable
Your team must understand how their daily activities and work impact these metrics. KPIs need to be tied back to performance and the objectives for your functional teams. Furthermore, make sure someone is directly responsible for the success of each KPI.
Give You the Path to Move Forward
KPIs reflect the factors that are critical to your company’s success. By defining an overall goal, you can better align daily activities to the success of your organization. When you look at them daily, you can see where strategy changes need to be made.
A solid understanding of your KPIs will help inform your decision-making and move you forward. This understanding will also help you make decisions about the health of your organization and where to make necessary adjustments.
Helpful KPIs All Organizations Should Measure
Small- and mid-size organizations tend to focus on a single financial statement, such as the accounts receivable (A/R) aging report or a balance sheet when evaluating customers, collections, operations, and more. Though financial statements have their place and certainly contribute valuable data to the conversation, a single financial statement by itself doesn’t tell the whole story. It’s just a piece of the puzzle.
What you need is a healthy mix of the most meaningful KPIs at your organization to help fuel your decision-making and strategies. In an environment of increasingly limited resources, it’s important to know what success looks like and track the proper metrics to achieve your overarching goals.
Financial Metrics to Track
The current ratio is calculated by dividing current assets by current liabilities.
- Current assets are short-term assets that will be converted to cash within a year.
- Current liabilities are debts that will be paid to creditors within the year.
This ratio helps paint a picture of your liquidity, or the speed and ease at which an asset may be converted to cash at your company. Lenders frequently use this ratio to understand your ability to pay bills. The higher the ratio, the greater your ability to pay.
Total Asset Turnover
Total asset turnover is calculated by dividing sales by the total assets of an organization. It is an activity ratio that helps you understand your organization’s ability to manage balance sheets, accounts, and revenue, and to show how efficiently you’re using your assets. Investors often use this metric to determine the likelihood of a good return on their investment in a certain organization. The higher the ratio, the more effective the organization is at using assets to generate income.
Days Sales Outstanding
Days sales outstanding is calculated by dividing the A/R balance by sales for a given period of time, then multiplying the answer by 30. This metric is used to determine the average time to collect receivables from customers to understand how many days of revenue are sitting in A/R. Be sure to only use credit sales in this calculation, as same-day sales can skew this number.
Days Payable Outstanding
Days payable outstanding is calculated by dividing the accounts payable (A/P) balance by purchases, then multiplying the answer by 30. This metric is used to determine the average time to pay your vendors. To get an accurate metric, you must know what types of payables are in A/P, such as rent or payroll, which can skew the calculation.
With both the days sales outstanding and days payable outstanding, you can understand how fast you’re collecting vs. paying.
Days Cash on Hand
Days cash on hand is calculated by dividing cash on hand by operating expenses, then dividing the answer by 365. It is meant to reflect the number of days your organization would survive without revenue and continue to pay its operating expenses. Be sure to exclude non-cash expenses, such as depreciation.
Nonfinancial Metrics to Track
Sales and customer metrics to follow include:
- New customers
- Repeat sales
- Customer retention
- Collection effectiveness
Looking at a customer level helps you see which customers require more attention and which show potential for a repeat sale. It takes a combination of several metrics to see the full picture. Software available today can help you pull data from your system and generate meaningful reports.
It’s also valuable to look at marketing metrics, including:
- Website visits
- Facebook likes
- Twitter followers
- Return on marketing investment
These nonfinancial metrics provide insight into other aspects of the company’s performance. With them, you can measure the reach to your customers and which marketing efforts get the most engagement.
Mixed Financial & Nonfinancial Metrics to Track
Finally, some of the most effective metrics are those that mix financial and nonfinancial data. These are KPIs you design to fit the financial and operational standards for success in your industry. The key is to identify the production metric that is key in your industry, such as charge hours in accounting. Examples include:
- Sales per square foot in retail
- Revenue per employee in professional services
- Revenue per available room in hospitality
- Revenue per active patient in healthcare
- Cost per action in marketing
Once you have your KPIs measured, you must benchmark them against your past performance and that of other organizations to understand if these measurements are poor, sufficient, or above average. As you review and create KPIs, ensure you are surrounded by advisors whose end game is to help your organization become better and pursue its metrics for success.
Using KPIs to Benchmark Performance in Any Industry
Benchmarking, put simply, is measuring your organization against others. With it, you can better understand your current position to determine how best to proceed and improve your organization. It’s best to refer to data from organizations within your industry, as they’ll have similar revenue and industry drivers, as well as organizations of a similar size to yours.
Benchmarking resources like online databases that acquire data across organizations can allow you to drill down within each industry by revenue size or asset size. The information is derived from users of resources, public data like the IRS, and company statements. You can look not only within your industry, but also at entities that are comparable in size to yours. When you use such resources, make sure you understand where the information comes from and how many respondents are involved.
Industry groups and publications are also great sources of financial and nonfinancial data. If they aren’t available to you, be sure to measure those metrics internally and use them as a point of comparison in a monthly or annual analysis.
In determining which KPIs to include in your benchmarking program, there are a few best practices to consider:
- Start with your strategic objectives. Your KPIs should be driven by your strategy. What key questions are you trying to answer and what outcomes are you trying to achieve?
- Determine how you’ll measure your KPIs. Do you have the tools necessary to gather data efficiently, or do you need to put new software in place?
- Choose only the most important KPIs to avoid information overload. Narrow tracked KPIs to a short, manageable list of the most meaningful metrics to report on regularly. Don’t simply track data that’s easiest to gather.
- Create a data-driven culture. Communicate the importance of incorporating data into decision-making processes, improve people’s skill sets, and embrace change. Incorporate data into your team meetings and regularly revisit it.
- Implement technology to track and visualize KPIs. Identifying the technology you’re going to use to visualize your KPIs should be the last step in this process because technology by itself does not create value from this data.