A recent article featured in CFMA Building Profits discusses several tips for ensuring contractor success. These tips are separated into three categories: honesty, cost control, and preparation.

Honesty

Honesty involves a contractor continually evaluating its strengths and weaknesses. This analysis should include a comprehensive review of the company's financial performance, including benchmarks such as profitability, receivable/ payable aging, interest expense, and cash flow. Obtaining third-party input into this analysis from the contractor's CPA firm and Board of Directors can often increase accountability when rectifying weaknesses.

Another aspect of honesty involves determining a company's niche. Contractors may subsequently use the company's knowledge in that area to maximize profitability. Once a company determines its area of expertise, it may be difficult to change its core business model.   For example, if a contractor that typically performs private work elects to perform public work, there will likely be a learning curve that should be evaluated prior to accepting the work.

Cost Control

Savings from implementing cost control procedures can accumulate over time to greatly increase profitability. Cutting costs should be considered not only during economic downturns, but also as a part of normal operations. Additionally, it is important that employees who participate in the cost-cutting concept are rewarded for their efforts. Some tips for controlling costs are as follows:

• Improve the company's safety plan
• Prevent small tool losses
• Reward employees for being frugal
• Manage purchase orders and implement centralized controls

Preparation

Preparation and planning should be a part of each key manager's job responsibilities.   Short-range planning may consist of items such as market analysis, budgeting, overhead burden analysis, and potential opportunities and threats.   Long-range planning, alternatively, may focus on future goals as well as contingency plans in the event the company experiences a decline in revenue. Ultimately, effective planning can reduce confusion and emotion when new situations arise.  

For more information on implementing these tips to ensure your company's success, please contact Randy Schulz at (800) 880-7800.

** Tips for Contractor Success - "A Recipe For Contractor Success" article by Martha Ann Marley in the January/Feburary 2012 edition of CFMA Building Profits. 

The Construction Financial Management Association recently posted the results of their 2011 construction industry annual financial survey. The 2011 survey featured responses and detailed financial statements from more than 600 respondents in the construction industry. This information was compiled to analyze general trends in the construction industry as well as provide benchmarks for "best in class" key financial characteristics.

One of the most encouraging findings is the reported increase in backlog levels across all sectors. Reported backlog increased approximately 90% from last year's levels, achieving its highest level since 2008. The largest improvements were in the Industrial & Nonresidential and Heavy & Highway categories of contractors. However, the number one concern for survey respondents continues to be the identification of sources of future work, with 51% of respondents listing it as their largest concern.   This percentage decreased from 73% last year, indicating that while future work is still the largest concern, the level of concern is lesser than in prior years.

In addition to an overall analysis of the construction industry, the survey provided the following financial ratios that are considered "best in class":

• Return on Assets: 13.6%
• Return on Equity: 39.8%
• Fixed Asset to Net Worth Ratio: 23.8%
• Debt to Equity: 1.9
• Working Capital Turnover: 10.0

For more information on the results of the survey as well as a comparison of your company to the "best in class" benchmarks, please contact Paul Esche at (800) 880-7800.

**2011 CFMA Financial Survey - Obtained from CFMA's Construction Industry Annual Financial Survey 2011, compiled and analyzed by Moss Adams LLP with a foreword by Anirban Basu.