Managing a profitable electrical contracting business demands a high level of efficiency and productivity. You push your office staff members and field employees to use their time wisely, but how well are you using financial information to gauge the results? Here are some ratios you can use to measure your company’s efficiency.
To calculate these ratios, you will need to know your total sales revenue and the number of clients, projects, days and hours worked, and field employees. Let’s assume you had $5 million in sales last year and did 50 projects for 50 different customers, using 50 field employees.
First, calculate your average sales revenue per client. Using the sample figures, your per-client average would be $100,000.
Average revenue per client = (total revenue) $5 million / (No. of clients) 50 = $100,000
To evaluate this number, you must compare your company to competitors and measure your own trend over time. Is revenue growing or shrinking? Are you serving more or fewer customers each year? Are you generating repeat business or continually marketing to new prospects? The number alone doesn’t explain who your customers are, whether there are too many or too few, or whether you serve them well enough to bring them back.
What happens if you substitute jobs for clients in the equation?
Average revenue per job = (total revenue) $5 million / (No. of jobs) 50 = $100,000
Now, you can get a better picture of efficiency as it relates to repeat business.
You have an average of one job per client, so your result is the same as for the first ratio. As repeat business improves, this number declines. Say, for example, you are doing 200 jobs with the same number of customers.
Average revenue per job = (total revenue) $5 million / (No. of jobs) 200 = $25,000
The lower average job size may seem undesirable because the ratio, by itself, does not reflect benefits associated with customer loyalty, such as reduced marketing costs.
However, if you use only completed jobs, the failure of the ratio to capture work-in-progress will complicate the analysis. Also, your revenue would probably increase, since the average job size normally remains stable or increases with repeat business. By tallying your mobilization costs per job, you can determine whether a particular average job size works for you. If it costs you $2,500 to create the file, negotiate a contract, order materials, do shop drawings, and provide a minimum level of equipment, storage and labor, then you expend one-tenth of your average job revenue just to begin the job. If it costs you only $500 per job to mobilize, then you can handle smaller projects more efficiently.
Now, let’s look at daily and hourly statistics. First, calculate your daily volume per client, assuming your business operated for 250 days last year:
Average daily volume = (total revenue) $5 million / (No. of days worked) 250 = $20,000
You also can perform an hourly calculation, assuming an eight-hour day:
Average hourly volume = (total revenue) $5 million / (No. of hours worked) 2,000 = $2,500
These two ratios show you how much sales revenue you need to sustain your current labor force and how much is deferred during down time. Assuming a lag time of two or three months between earning sales revenue and receiving cash from billings, you also can use the information for cash flow projections.
Take this another step, and measure volume per employee. Using the example of 50 field employees, each generates $100,000 in revenue per year. If each works an average of 2,000 hours annually, then you know that your current labor capacity is 100,000 hours per year (50 workers × 2,000 hours). You also know that each field person generates $50 in revenue per hour ($5 million in sales ÷ 100,000 hours). Compare this to your cost per hour, include overhead, and decide whether your hourly billable rate is sufficient at your current revenue level. You can expand the analy-sis to include profit calculations, such as profit per client, field employee, day or hour, although your profit is directly affected by the size of your overhead and field productivity.
It’s easy to get carried away with the analysis once you start to play with the numbers. Also remember, the numbers don’t reflect the relationships you have with your customers, how promptly they pay your invoices or the ideal revenue level for your company. All financial analysis is limited, so remember the two main reasons for doing this analysis: awareness of your current financial picture and how it supports management decisions.
Next month, we’ll look at the impact of trend analysis on your planning.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at firstname.lastname@example.org.