Steve C. Tenney, CPA, is a stockholder and chief financial officer (CFO) of Story Construction Company, a nonresidential general contractor, design builder and construction management company in Ames, Iowa. Tenney is a past chairman of the CFMA, and has over 35 years of experience in the construction industr
We live in a competitive world. Who has the most marketing leads? Who won the bid? What is your safety record? Pertaining to your self-performed work, what are the actual production rates compared to the budgeted production rates? Is work being performed on time, and with the level of quality that is desired? Whatever the question, you have to know the score.
Know the Score
Contrary to some opinions, it’s not just the final score that matters, but it is also how you measure that score and use that information to improve. For example, in sports, you evaluate your competition, their statistics, the active players and how your team will match up. Sure, it’s fun to win games, but the long-term vision might evaluate individual game results, how you are doing in your division, your playoff position and the pursuit of the championship.
The construction industry is similar. How busy is the competition? What has the competition’s record been with the client or project you are pursuing? How has it priced similar work? Which subcontractors line up best for the project pursuit, and do you get their “A” teams on the project? A company really needs to know its score in many areas, including financially. How is that potential client evaluating your company? Is the client looking at the strength of your balance sheet and income statement to compare you with your competition? Does it require prequalification? Is the company looking at your backlog to see if you have capacity for the project?
Bankers are going to compare your company against industry averages to see if you are a good credit risk. Your surety is going to compare you to its current client base and other industry benchmarks to determine bonding capacity and project restrictions. For businesses, benchmarking is an evaluation method that can see how your company compares to others. The following are a few definitions for “benchmark,” according to Merriam Webster.
- Noun—A point of reference from which measurements may be made, or, something that serves as a standard by which others may be measured or judged
- Verb—Evaluate or check by comparison with a standard
Knowing about your own organization is a good place to start. Benchmark your organization to see how you are doing this year compared to prior years. Use that information to help with your plans for the upcoming year and the next 5 years. Evaluate what changes you want to make to gain a competitive edge over your competition. You have to know what to measure in order to have an effective, strategic evaluation process. Know where have you been and where you want to go. When you have a direction on where you want to go in the future, you can begin looking at what you need to change to get there.
Tell your story, instead of being told your story. By performing benchmarking on your own and presenting your information, you will be ahead of your competition. When you meet with your financial partners, brag about your successes and admit your shortcomings, along with your plan for improvement. Help your financial partners see your vision and how you plan to get there.
Convince them that you know your business, your competition and industry trends. It is better to be the storyteller. Use benchmarking information to your advantage.
Use Benchmark Information Sources
Your financial partners may be willing to help you with benchmark information. Several CPA firms are now helping their clients’ business evaluations by sharing benchmarking reports. Your surety partner may also help you to see how you stack up with some of their benchmarking comparisons.
Your banker will underwrite your risk based on benchmarking comparisons. Your banker may identify some loan covenants based on your financial status. They may even be willing to share their credit evaluation measurements with you.
The Construction Financial Management Association (CFMA) has a helpful benchmarking tool with a catchy name, the “Benchmarker.” The tool helps you do some of the following:
- Grab your financial statements and enter the current data you want to use to compare. You can enter historical data if you want to see trends, too.
- Decide what peer group you want to benchmark against. This could be company size, geographic operating area, subcontractor or specialty category and other groupings. Some companies may also choose to benchmark internally between divisions.
- Once you have selected your benchmark group, produce the reports you want.
Some benchmarking is basic and compares current ratio, debt to equity, days of sales in receivables, return on net assets and others. The data can be more complex and detailed, too. The real benefit is determining what the ratios and results mean for your business going forward. You can even benchmark your future projections to see how your future results compare to current industry standards and trends. This helps you concentrate on the factors that will generate the results you desire. It also helps you position your company more competitively in the market.
It is important to present this information to your audience. Know your audience and whether you are presenting the information internally to management, to your bank or to others.
Understand Key Performance Indicators
One of the next steps is identifying key performance indicators (KPIs). In short, KPIs measure factors that impact results. For example, if one of the ratios that the company wanted to improve based on the benchmark comparisons was to reduce the number of days that a sale ages in accounts receivable, a KPI might be established to focus on collection efforts.
Find Your Competitive Advantage
Remember that meeting with your bank, prepared with benchmark data, the plans you have and the confidence you showed in the presentation of information could result in a ½ percent off that line of credit costs.
That big job that you were hoping to be able to submit a bid on, but was pushing your surety line, may have just moved to the win column after you gained the added capacity from your surety, simply because you shared your story and recapped the trend information from your benchmarking efforts. And don’t forget about the insurance company that realized you have established measurements that are more leading indicators for safe activities and you have started to see a decline in your incident rate frequency. As a result, you got a better renewal on your workers’ compensation policy.
The more you know about your own company and its competition, the better you can position yourself on the road to success. Benchmarking can make a difference in your company when you use the information to improve your results and gain competitive advantage.