What are the key metrics to track in construction financial statements for business performance?

Introduction:

As a construction business owner, you know how important it is to monitor your finances closely. But beyond simply monitoring your revenue and expenses, there are several financial metrics you should be tracking to understand your business's finance achievements truly.

By monitoring these metrics, you can pinpoint areas where you can improve profitability, identify potential cash flow issues before they become significant problems, and make intelligent decisions about investments and growth opportunities.

In this blog post, we will discuss the key financial metrics construction business owners should track to evaluate their business performance effectively. We will delve into the significance of each metric, how to calculate them, and how to use them to make informed business decisions.

By the end of this post, you will better understand the financial health of your construction business and how to optimize your financial statements for long-term success.

What are construction KPIs?

In the construction world, Key Performance Indicators or KPIs serve as crucial metrics for measuring the overall success of a project. These indicators are typically percentage-based metrics that allow project managers to track progress and recognize areas for improvement.

Construction KPIs widely suggested by professional construction accountants to track include on-time delivery, safety performance, budget variance, productivity rates, and client satisfaction.

By measuring these critical performance indicators, construction teams can gain invaluable insights into the efficiency of their operations, enabling them to adjust strategies and allocate resources in real-time to keep projects on track and achieve optimal results. Ultimately, using KPIs helps ensure that projects are completed on time, within budget, and to the highest quality and safety standards.

Key performance indicators for construction project management

Here are six KPIs highly recommended to keep track of as a construction team leader.

• Safety:

  In the construction industry, having a safe site is crucial as it can reduce the risks and long-term costs associated with any project. Any safety issues can result in significant setbacks in time and money. Furthermore, safety incidents can lead to higher insurance premiums. Therefore, construction companies must understand their safety ratings to lower expenses and keep their workforce productive. KPIs for safety in the construction industry include:

  • Total number of safety incidents
  • Number of employee hours lost due to safety incidents
  • Number of safety training hours completed
  • Total number of injuries
• Quality:

  Gaining a comprehensive understanding of the overall quality of your construction projects can significantly reduce the need for changes and rework. Therefore, keeping a close eye on quality metrics is a foolproof method of staying on track with your project's budget and schedule. By using the KPIs discussed below, your team can ensure that each project is a success:

  • Total number of reworks
  • Number of customer complaints
  • Percentage of projects completed on time and within budget
  • Number of change orders
  • Quality score (derived from customer feedback)
• Productivity:

  The construction industry is highly dependent on the productivity of its workers and equipment. To keep projects within budget, construction companies need to use resources efficiently. This can be achieved by monitoring KPIs that measure the output of employees or machinery. KPIs for productivity include:

  • Total number of working hours
  • Number of completed projects
  • Number of labor hours per task
  • Equipment utilization rate
  • Productivity score (measured by employee output)
• Cost management:

  Construction projects are complex and often have tight budgets, so cost management is essential to reach a satisfactory outcome. Keeping track of expenses and pinpointing areas where money can be saved is important to stay within budget. The following KPIs can help you stay in control of your costs:

  • Total project cost
  • Cost per unit
  • Material costs
  • Labor costs
  • Number of change orders
  • Overhead costs
• Time management:

  Time is of the essence in the construction industry. Delays can lead to costly results, so construction companies need to stay on track with their deadlines. Tracking KPIs related to time management will help you understand where labor and resources are spent and identify potential delays before they occur. KPIs related to time management include:

  • Number of days in project completion
  • Percent of the project completed on schedule
  • Average response time for customer inquiries
  • Lead times for various materials and supplies
• Client satisfaction:

  Client satisfaction is a crucial metric for the success of any construction task. Clients are likely to return if satisfied with their experience, while negative experiences can lead to significant reputational damage. Therefore, keeping track of customer feedback is essential to understand your company's performance. The following KPIs can help you evaluate the success of your projects:

  • Number of customer complaints
  • Customer satisfaction score
  • Percentage of repeat customers
  • The number of customer surveys completed.

Key financial metrics to track in construction financial statements for business success

Tracking critical financial metrics is essential to take your construction business to the next level. By closely monitoring your financial statements and accounting for construction strategies and financial information, you can identify potential issues before they become significant problems and make data-driven decisions that drive growth and profitability.

However, knowing where to start with many different metrics to track can take a lot of work. That's why we've compiled a list of the top 7 metrics you should follow in your construction financial statements. With these metrics at your fingertips, you can proactively address any issues and optimize your economic achievements.

• Profit margins:

  Gross profit margin, net profit margin, and operating profit margin are all critical indicators of a construction company's financial status. These metrics measure the company's ability to generate profits from its projects.

  A higher profit margin indicates that a company generates more revenue from each project and can cover overhead costs and other expenses. A lower margin may mean that the company needs to be pricing projects correctly or is spending too much on materials and labor.

  It is essential for construction companies to closely monitor their profit margins to identify any potential issues that could be impacting profitability. Additionally, these metrics can provide insights into which projects are more profitable than others, allowing companies to make better decisions about which projects to pursue.

• Liquidity:

  During economic uncertainty and market volatility, banks prioritize higher liquidity measures and the company's ability to fulfil its obligations as they arise. Therefore, contractors must closely monitor their operating cash flow results and general liquidity conditions.

  To succeed in the long run, companies must strive to increase profits and adopt strategies to retain additional cash flows within the business.

  By doing so, they can ensure their ability to meet obligations as they arise and improve their overall financial stability. It is essential to have a proactive approach toward cash flow management to stay prepared for any unforeseen circumstances that may occur in the future.

• Leverage (Borrowing):

  The amount of leverage a business has taken on is an essential indicator of financial performance. Leverage measures the ratio of debt to total assets. It can be used to determine how much risk the company is exposed to regarding its ability to meet future obligations.

  If the borrowing ratio increases, it could mean that more funds are needed to finance operations or the company needs to be more leveraged.

  On the other hand, a decrease in leverage could indicate improved performance due to an increase in equity capital or reduced borrowing costs.

• Solvency:

  Solvency measures a company's ability to pay its long-term obligations. Generally, this is calculated by comparing the company's current assets to its total liabilities.

  A higher ratio indicates the company has enough assets to cover its debts and other financial commitments. On the other hand, if the ratio drops, it could suggest that the company has difficulty meeting its financial obligations.

  Solvency ratios are essential for monitoring as they provide insight into a company's long-term financial status. Companies should strive to maintain higher solvency ratios to ensure their financial stability now and in the future.

• Average accounts receivable:

  Average accounts receivable is an essential financial indicator that measures the efficiency of a construction company's billing system. It shows how quickly customers pay their invoices, which can give managers an insight into the performance of their sales and credit processes.

  A high average of AR indicates that customers are taking longer than usual to pay invoices, which could suggest that problems exist with the billing system or customer relations.

  It's essential to keep track of accounts receivable regularly so that managers can take action to ensure timely payments from customers. Managers should also review credit policies and customer service practices to identify potential improvement areas to reduce average accounts receivable. This can help improve cash flow and the company's financial status.

• Average accounts payable:

  Average accounts payable is another critical metric for evaluating the financial status of a construction company. This metric measures how quickly vendors are paid and help identify any issues with payment delays that might adversely affect vendor relationships. If payments are consistently late, it could mean a problem with cash flow management or inadequate funds to pay vendors on time.

  A good accounts payable ratio should be lower than the payment terms agreed upon with vendors. A high ratio can indicate that payments need to be made on time, which could disrupt the continuity of supply for materials and services. Therefore, construction companies must ensure timely payments to maintain good relationships with vendors and suppliers.

• Break-even analysis:

  Break-even analysis is a financial tool that helps businesses determine the sales volume level needed to cover all their costs and expenses. In the case of a construction company, break-even analysis can be used to determine the minimum amount of revenue required to cover the costs associated with a particular project or the company's operations as a whole.

  By calculating the break-even point, a construction company can determine the minimum revenue it needs to generate to avoid losses. This information can be used to set pricing strategies, estimate the number of projects that need to be completed to reach profitability and evaluate the financial feasibility of proposed projects.

How to choose the best KPIs for your construction projects?

Choosing the right KPIs for your construction work can be critical to its success. To do this, it is essential first to identify the project's goals and objectives. These may include timelines, budgets, and quality standards. Once these are established, relevant metrics can be selected to track progress toward these goals.

Learning from past mistakes and successes is essential, as this can help identify areas where KPIs could have been better utilized or were misaligned with project goals. Regularly reviewing and adjusting your KPIs throughout the project can help ensure that you measure what matters most to its success and that the project stays on track toward its objectives.

Ending note

Construction businesses rely on various metrics to monitor business activity and ensure compliance with accounting and reporting requirements. While thousands of performance measurements are available, identifying the critical metrics specific to the industry standards is crucial for monitoring the business's overall health.

Key Performance Indicators (KPIs), when grouped and presented in a construction accounting software dashboard with easy-to-read graphics, provide a quick view of the company's financial health, enabling executives to focus on critical metrics and identify opportunities and challenges.

Understanding essential metrics such as net income, liquidity, sale trends, accounts receivable days, etc., is necessary for construction companies to ensure they're on track to meeting their financial goals.

If you are looking for guidance and expertise on effectively leveraging key construction financial metrics for improved business performance, contact CleanSlate today!

Our accountants and bookkeepers have decades of experience working with construction companies to ensure their financial success. We can provide the insight, analysis, and advice necessary to make smart decisions about your business's long-term health.