Most of the time when people ask "How are you doing?" they are just extending a curiosity and don't even listen to the answer.

But really - how are you doing? Actually, what I mean is, how is your business doing?

Today I want to talk about two ways to measure your company in order to really see, "how you are doing?"    

Both measurements come under the category benchmarking. The first measurement is internal benchmarking or goal setting and tracking. The second benchmarking measure is to compare yourself against your peers based on industry data.

Internal benchmarking is when you track critical internal data against a budget or goal. Usually the most useful data is data that shows you how you are doing long before financial information are available.

For instance, in a typical case, you perform mechanical maintenance work and an average bid is $10,000. You need $100,000 of work a month to meet your goals. You should track the number of bids and total dollar value of bids going out. You should track the number of awards from those bids. This should be on a simple chart and reviewed weekly.  

If over time you know that you typically win 1 in 3 bids then you know you need to have 30 prospects or bids per month in order to have a shot at obtaining 10. If you bid 40 last month, things should be going well (stay focused on your wins though, "should" is dangerous) and if you bid 20, you need to increase prospecting.

From this data you now know how your business is doing in real time as opposed to 60 days later when all the invoices are paid and financials are produced.

In all likelihood you can drill down to 5 or 7 key indicators that will tell you how your business is doing early while you can make adjustments.   Typically these tie into your sales pipeline (described above), your production/delivery progress, and your billings and payables. Your system should track both units and dollars. You want to see across your entire business yet keep the system simple so the data can actually be collected, tracked, and reviewed.

The second form of benchmarking is to compare your business to industry data.

Industry data is available from many sources. The most available data is financial data from several companies that collect and sell the data to banks, accountants, and other advisors. Also, many industry trade associations collect and track much more detailed information. While not perfect, this data can provide a meaningful comparison for analysis on how you are doing. Often this data is sorted and available based on performance. For instance companies can be sorted in the 25th, 50th, or 75th percentile of financial performance.

Since only half of all companies with revenues of $10 million to $50 million will sell, you want to compare yourself to companies in the 75th percentile or better. These are the companies that are performing well and are creating real value.

Your results will not mirror the industry data but the data will be useful for comparison purposes. For example, a drywall contractor may see that their cost of goods sold is 73% while the industry norm for companies in the 75th percentile is 70%. Yet overhead for the drywall contractor is 20% producing a 7% profit. The industry norm at the 75th percentile is 25% overhead and a 5% profit. In this case, profit is above industry norm.  

Perhaps this contractor spends a little more on direct labor, but because they have better people they are able to perform with less oversight. If this is true there is no reason to make a change based on the data. If not, perhaps the direct costs can be brought down. Perhaps better purchasing could reduce costs. Perhaps labor can be applied more efficiently. In all cases, do not use this data and analysis as a reason to rest on your laurels but as a process in order to find ways to improve.

Your Harvest Friends

                           -by Greg Caruso and Ed Davis  

Ed Davis (301) 325-7687  Email