Would you like to have a crystal ball to peer into your construction business’s future? Of course you would. But it’s tough to do that without the proper tools.
Lots of contractors use dashboards to help manage their companies. Typical dashboard components include volume, gross margin, net margin, and employee head count. But if you think about these measures, they're all backward-looking. By the time you get your dashboard report, they’re history. Think about it; when you get your profit-and-loss statement at the end of the month, what can you do about those numbers? Oh, you might be able to recast a few of them, but what can you do to genuinely adjust profitability or margins from last month or last year? Nothing.
You've heard us at various times talk about the difference between accounting and finance. Put very simply, accounting looks backward, and finance looks forward.
Let’s talk about the use of financial forecasting to make your business dashboard more forward-looking.
The reason historical items appear on contractor dashboards is because they're easy and they're obvious; someone has compiled the numbers. If you want to be able to look forward, to look into a crystal ball, it's somewhat more challenging. Looking into the future is always harder than looking into the quantifiable past.
In order to create a forward-looking crystal ball and improve the quality of your dashboard, you must drill down into your company and figure out what you can learn from reading the tea leaves. What are your leading indicators? What measures can tell you today where your company will be six or 12 months down the road?
Here are a few items:
- New business pipeline. You want to make sure your pipeline is full. When it isn’t, obviously, it needs to be refilled. If you don't have a good backlog now, that bodes poorly for your company down the road. You also want to look at your backlog sources; for example, if you traditionally get lots of your business from customer referrals, and suddenly they are drying up, that's something to pay attention to. What's going on? Are they less satisfied? It's also important to do a profitability analysis on your backlog. Make sure that you're maintaining healthy margins as you take on new work.
- Adherence to budget. You've got an enterprise budget (not just project budgets!) and forward-looking pro formas, right? How are you doing according to your budget? Is the top line where it needs to be? Are your expenses where they need to be? Where might you need to reallocate resources in the future?
- Satisfaction. Satisfaction should be broken down into two parts: employee and customer satisfaction. Most contractors use very, very informal ways of measuring both employee and customer satisfaction. We would suggest that you utilize more formal methods. For example, we get customer satisfaction numbers from our members twice per year using Net Promoter Score. Some commentators think Net Promoter Score is too simplistic, but it is the most universally adopted customer satisfaction measure, and it allows you to gauge how pleased your customers are across a variety of industries. When it comes to employee and customer satisfaction, get as much quantitative data as you can in addition to the word-of-mouth qualitative data that you normally collect.
- Customer engagement. One of our peer group members relies on a 17-point member engagement tool. It's a beautiful tool because it measures simple things like meeting attendance, virtual meeting attendance, number of inbound phone calls, visits to the customer web portal, times clicking on the company newsletter, etc. The more of the 17 checkpoints a customer utilizes, the more the customer is engaged. What does it mean to have an engaged customer? It usually means that the customer is likely to stay with you for a really long time. If you assess that some customers are less engaged, it's time to break out the tender loving care and work on the relationship.
- Safety. All contractors measure safety, but the way they do it is usually backward-looking. What are the ingredients that lend themselves to predicting a safe work environment for the future? Studies show it usually comes down to four simple behaviors: wearing hard hats, eye protection, gloves, and foot protection. Contractors that measure high adherence to these four items are generally assured of excellent safety records and can predict improving safety stats for the future.
Developing a forward-looking business dashboard can provide real insights into not just how the company has done in the past, but how it is likely to perform in the future. Your dashboard can be your crystal ball.
Wayne Rivers is the president of The Family Business Institute, Inc. FBI’s mission is to build better contractors! Wayne can be reached at 877-326-2493, [email protected], or on the web at www.familybusinessinstitute.com