Summer 11 - Dashboard Metrics for Contractors
Which financial and performance ratios are most important to a construction company? While financial analysts’ opinions may vary, here are several widely recognized metrics that virtually every contractor should monitor closely:
Current Ratio (current assets/current liabilities) – This compares the availability of current assets to satisfy current liabilities. A minimum ratio of 1.0 is usually desirable.
Return on Assets (net pretax earnings/total assets) – This shows how effectively your company is using its assets. It’s usually stated in percentage terms (i.e., a 5 percent return on assets).
Debt to Equity (total liabilities/total net worth) – One of the most important financial ratios, this measures how highly leveraged your company is. A higher ratio creates additional risk. A ratio of 3.0 or lower is usually acceptable.
Months in Backlog (backlog/average monthly revenue) – This measures the number of months it will likely take to complete all contracted work. A drop in backlog is an obvious cause for concern.
Backlog Profit to Overhead (projected gross profit in backlog/fixed overhead) – This tells you if the projected profit in your committed jobs will be adequate to cover your ongoing operating costs.
Backlog to Working Capital (backlog/[current assets – current liabilities]) – This is another measure of leverage. A higher ratio may indicate you will need additional working capital to complete the work for which you are committed.
Days in Accounts Receivable and Days in Accounts Payable – In addition to regularly monitoring these two key measures of liquidity, compare the two side-by-side to be alerted to coming cash flow problems.
Financial ratios should not be viewed in isolation. Compare them to industry benchmarks and monitor them over time to identify trends and changes.
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