Waiting for the economy to rebound can be highly stressful for an electrical contractor, and one way to reduce that stress is to step back and gain perspective on your financial situation. Remember that there are three overall frameworks for analyzing your financial data—analyzing trends within your own company, comparing with selected competitors, and measuring against the entire electrical construction industry. You will most likely find that you have a successful history and your problems are shared.
The numbers on each set of financial statements reflect a snapshot taken at some point in time. In other words, this is only a temporary measure of your competence, within the big picture of your business process. Your company’s health cannot be judged by a sampling of monthly or even annual financial statements. Unless you are new to the electrical contracting industry, you should be using the latest financial statement as a benchmark, not an indicator of your overall financial strength.
To dig deeper, gather financial data for the past 10 years and graph the trends for significant parameters, such as sales revenue, gross margin, overhead and profit. If possible, go back 20 years. If you have the extra time, reflect on key political and economic events throughout those years. External factors beyond your control may have affected your data. Despite these factors, you will probably find that you did fairly well over time
Now look for specific patterns, using background information. For example, what is the composition of your sales revenue each year? Did revenue jump during one year because you won an exceptionally large contract? Has the average size of your jobs changed over time? Are you doing more work for certain customers who might be less profitable? Was there a balloon payment on a loan that decreased your cash substantially in one year? Only you can look behind the numbers to find the true meaning of your data.
It can be difficult to acquire financial information for privately held electrical contracting firms within your market area. Trade associations often provide CEO roundtable groups to overcome this problem. Join such a group, and you will be able to share financial and other business information with electrical contractors who are not direct competitors. In this way, you not only gain some perspective on how your numbers compare with companies in different geographic, market and volume categories, but you will be reassured by the similarities between your company and others.
As you compare strategies for solving cash flow, revenue growth and profitability problems, you will feel more confident in the decisions you already make, and you will expand your support network. Sometimes, making a phone call for a second opinion can prevent you from making a poor business decision due to being too close to the situation.
Industry—the big picture
You also need to measure your financial performance against the entire electrical contracting industry. Several organizations regularly collect and publish financial information. The “Electrical Contractors Financial Performance Report 2008” (publication 1055-09) is available from the National Electrical Contractors Association (www.necanet.org—$25 for members/$75 for nonmembers). Published biennially, it is a compilation of financial statement data from several hundred NECA members, sorted by sales volume and geographic region. Explanations of key financial ratios, recommended targets and a section on cash flow management provide a user-friendly sampling of the electrical construction industry. Data is broken out separately for high-profit firms.
The Construction Financial Management Association offers its “2008 Annual Financial Survey” (publication No. 160), compiled from the statements of 750 member companies. Data is categorized by contracting specialty, revenue and region, using 20 key financial ratios. The publication includes a section on field recruitment and retention, a benchmarking tool to facilitate your comparisons, and a “best-in-class” performance analysis in each category (www.cfma.org—$75 for members/$90 for nonmembers).
You can also explore financial data through the lens of the Risk Management Association (www.rmahq.org), which publishes “Annual Statement Studies,” a consolidation of more than 220,000 borrower and prospect statements submitted by member financial institutions. More than 755 industries are represented, using similar ratios and categorizations as those listed above. Find “eStatement Studies” (publication 611651), and order the individual download for Electrical Contractors 2008–2009, under North American Industry Classification System (NAICS) code 238210 ($70 for members/$110 for nonmembers).
Regardless of where you obtain your information, remember that no sample is perfect, and the data must be interpreted. You will never know all of the factors affecting financial data, and it is easy to become mired in the details. Ultimately, you are the best judge of what affects your financial performance and which strategies best use the talents and experience of your staff. The numbers are a tool, but you are the master of your craft.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at email@example.com.