The Benefits of Effective Financial & Operational Benchmarking

Transcription

1 The Benefits of Effective Financial & Operational Benchmarking Michelle Walker, Specialized Services Company Kevin Burnett, The Sundt Companies, Inc. Tony Hakes, CBIZ MHM, LLC

2 To Earn CEUs for this Session Participants must: 1. Check in with attendance proctor at the door. 2. Attend at least 95% of the session. 3. Complete the post-program evaluation. 4. Complete a brief assessment with a score of 75% or greater. The Associated General Contractors of America (AGC) has been accredited as an Accredited Provider by The International Association for Continuing Education and Training (IACET). In obtaining this accreditation, AGC has demonstrated that it complies with the ANSI/IACET Standard which is recognized internationally as a standard of good practice. As a result of their Accredited Provider status, AGC is authorized to offer IACET CEUs for its programs that qualify under the ANSI/IACET Standard.

3 Kevin M. Burnett, CPA, CCIFP, CRIS Senior Vice President, Chief Financial Officer The Sundt Companies Inc. Anthony M. Hakes, CPA, CCIFP, CGMA National Practice Leader Construction Industry Services/Attest Practice Leader CBIZ MHM, LLC Michelle Walker, CCIFP, SPHR Vice President of Finance & Administration SSC Boring

4 Learning Objectives By attending this session participants will be able to: 1. Describe the different types of benchmarking. 2. Analyze financial statements looking for warning signs. 3. Identify key financial and operational ratios that they should be calculating to benchmark their company against peers. 4. Implement changes to drive improved financial and operational performance.

5 What is Benchmarking? Definition: Benchmarking is the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders. David T. Kearnes, CEO, XEROX Corporation

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8 Self-comparison Benchmarking Benchmarking without action is just keeping score People attempt to perform at higher levels if their performance is measured How do we compare against ourselves (last year, last job, etc.): Comparative financial statements Closed job analysis Historical ratio analysis Unit of measure productivity assessments

9 Measuring Performance Use reliable financial data A system of accurate job cost data Timely and readily available financial and job cost data

10 Ratios and trends tell a story about a Company

11 Liquidity Ratios Current ratio: Trend to follow deterioration is a sign of concern Working Capital: Bonding capacity Prequalification factor for Owners, GCs Quality of working capital? Cash on Hand: What is your target short? What calculation works best for your company? Days of Cash % of Revenue

12 Profitability Ratios Tracking job profit, gross profit and net profit Trend Evaluating Job Profit by Project type Delivery method Owner type

13 Leverage and Performance Ratios Cash to overbillings > 1:1 Underbillings to equity < 20% Fixed assets to equity < 1:1 Annual principal debt service > depreciation financing equipment greater than useful value Interest income Little or none could indicate poor use/investment of cash assets

14 Efficiency Ratios How well are you turning and using cash assets? Average age of receivables Variable based on contractor type GC vs. Sub Average age of payables Variable based on contractor type and payment agreements (Pay when Paid)

15 Other Indicators to Watch Overhead increase % > Revenue increase % Accounts receivable from officers or related parties Is company dependent on inside financing to operate? May be a tax or succession planning strategy in small/closely held companies has to have logic

16 Other Indicators to Watch Real estate development activities Are you a construction company or a real estate development company? Cash used to purchase non-operating assets Toys on the books of a Construction Company are warning signs

17 Key Operating Indicators Losses for 2 or more consecutive years Backlog to trailing 12 months revenue 1,400,000 1,200,000 1,000, , , , ,000 0 Backlog to Revenue Largest job > 150% of previous largest job Backlog Revenue

18 Key Operating Indicators (cont.) Labor: Major cost center (perhaps largest) Mismanagement = increased cost & risk Critical point of regular evaluation Find metrics that work best for your organization

19 Key Operating Indicators (cont.) Labor: As a % of job cost/contract revenues Looking for escalation trends Looking to prevent erosion of gross margin Estimated labor hours to actual labor hours: Are cost escalations due to rising labor cost or productivity issues?

20 Key Operating Indicators (cont.) S Curve Graph (Billings to Cost to Time) % Project ABC 90.00% 80.00% 70.00% Expect costs and billings to exceed time % by 5% to 6% 60.00% 50.00% 40.00% Expect to have costs and billing exceed time % no later than the 30% mark 30.00% 20.00% 10.00% 0.00% Time Cost Billing

21 Compare Against Best-in-Class Average vs. best-in-class Average is just average Best-in-class is a goal worth achieving Top 25 percent of most profitable firms Set strategic goals 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Best in Class Comparison Industry Ave Best in Class ABC Contractors 0.0% Gross Profit G&A as % of Rev OP Inc as % of Rev

22 Identify Areas for Improvement Incorporate financial benchmarking into periodic reporting Financial ratios to be measured Formulas Best-in-class benchmark ratio results Your company s ratio results Comments/action plan

23 Questions?

24 Kevin M. Burnett, CPA, CCIFP, CRIS Senior Vice President, Chief Financial Officer The Sundt Companies Inc. Anthony M. Hakes, CPA, CCIFP, CGMA National Practice Leader Construction Industry Services/Attest Practice Leader CBIZ MHM, LLC Michelle Walker, CCIFP, SPHR Vice President of Finance & Administration SSC Boring

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