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If you think of your construction company as a car, what are the most important indicators on that dashboard that you should be watching in order to keep it running smoothly? We’re breaking down ten key gauges that provide insights into the health and efficiency of your company.
Topics we cover in this episode include:
- Speedometer – Sales Growth Rate
- Tachometer – Project Efficiency
- Fuel Gauge – Back Log
- Oil Pressure Gauge – Cash Flow Management
- Temperature Gauge – Risk Management
- Odometer – Project and Company Milestones
- Check Engine Light- Early Warning Indicators
- Battery Voltage Gauge – Financial Stability
- Tire Pressure Monitor – Resource Allocation
- Navigation System – Strategic Planning
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
Amanda Darr, Digital Marketing + Design Expert | AmandaDarr.com
TRANSCRIPT
[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. Today we are continuing our recent episode on benchmarking by discussing ways to use your benchmarks to manage your construction business by creating dashboards for your company.
Here on the Contractor Success Forum, our mission is to provide game-changing financial education for contractors to help you be more profitable, grow, and succeed in your business.
And who is here to help us do that? As usual, Stephen Brown with McDaniel Whitley bonding and insurance. And I’m Wade Carpenter with Carpenter Company CPAs. And today we are really privileged to have Amanda Darr of Amanda Darr Designs as our guest host. And she is one of the ones that’s been with us behind the scenes since the beginning, over two years we’ve been doing it. And she makes a couple of old guys look good. And I know we know what a big chore that is.
[00:00:59] Stephen Brown: Beauty and brains.
[00:01:01] Wade Carpenter: Yep. Amanda, can you tell us–
[00:01:03] Stephen Brown: -you, Wade, but no, no, Amanda, you are too.
[00:01:05] Wade Carpenter: okay,
[00:01:06] Amanda Darr: Thanks. you. And thanks
[00:01:08] Stephen Brown: I’m kidding.
[00:01:09] Amanda Darr: –introduction. Happy to be on this side of the, the podcast. I’m usually behind the scenes, but as Wade said, I’m Amanda Darr. My company is Amanda Darr Design, and I help businesses with their online presence, digital marketing, websites. I do all kinds of fun stuff. So thanks for having me today.
[00:01:27] Wade Carpenter: We’re glad to have you.
[00:01:28] Stephen Brown: –you on the podcast, Amanda. We love it.
[00:01:31] Amanda Darr: Thanks.
[00:01:32] Stephen Brown: Wade, the topic today.
[00:01:34] Wade Carpenter: Yeah.
[00:01:34] Stephen Brown: Key performance indicators, all this stuff. Now NASCAR drivers have digital dashboards and they used to be analog up until 2016. And analog being actual physical instrument clustered that measured the performance of their race cars. And as we were talking about this topic, and the topic kind of came up last week is if your construction company was a race car and you were driving and then you wanted to drive it at peak performance, what instruments would you rely on?
And in a car, there’s so many different gauges. There’s the speedometer and there’s the fuel gauge, and then there’s the warning lights of course. And then the tachometer, which I love, which, boring to most people. Amanda, you probably don’t watch your tachometer every minute.
[00:02:21] Amanda Darr: I don’t even, I didn’t even know what it was to be honest.
[00:02:23] Stephen Brown: Oh, okay. Well the tachometer measures revolutions per minute, and that’s how many times you’re, and it’s ballpark, but, my, my car idols around at the house and RPMs. And if for some reason it’s, it’s clunky or doing this, then it’s idling below a thousand and needs a tuneup. At least that’s the way it was in the old days.
And then the most important thing on the tachometer that we were talking about is the red line. If you’re running your engine in the red line, the revolutions per minute are so high, you’re gonna blow up your engine.
[00:02:54] Wade Carpenter: Yep.
[00:02:55] Stephen Brown: And I did that once. Just looked down, engine light was running hot I was running in the red line. I pulled over immediately and boom, I threw a rod and that was the end of my engine. I just sat by the side of the road feeling really bad.
[00:03:11] Wade Carpenter: Well, I think our, our goal today was to relate the dashboard theme to what we were talking about with our benchmarks and hope that makes some sense.
[00:03:22] Stephen Brown: We talk so much about key performance indicators. KPIs.
[00:03:26] Wade Carpenter: Right.
[00:03:26] Stephen Brown: That’s a fancy word for it, but all that means is ratios. Financial ratios that we use in our business, in the bonding business, and Wade, you use in the accounting business. And explaining the performance from the financial information that you’ve prepared.
[00:03:42] Wade Carpenter: Well, it’s more about the health of the company. And what we were trying to do was kinda like talk about some of these things in relation to building that around their business.
[00:03:52] Stephen Brown: Okay.
Speedomoter: Revenue Growth Rate
[00:03:53] Wade Carpenter: First one I was gonna throw out there was that speedometer and there’s there we’ve kinda talked about different ways we could talk, use these or whatever.
I think about it like revenue growth rate. Yeah, you could say, how fast you’re growing and sometimes in construction you can grow too fast. You can also grow too slow and there’s several measures we could look at with growth rate or customer acquisition rate, whatever.
Higher is generally better, but again, too rapid of growth can be a killer as much as going too slow on the highway, right?
[00:04:29] Stephen Brown: Well, if your car’s running smoothly, is that the objective of the speedometer? Not unlike a race where you wanna floor it, if the speedometer sails and you’re flooring it, you’d think that’s automatically good, right?
[00:04:44] Wade Carpenter: Well.
[00:04:44] Amanda Darr: Until you hit curve.
[00:04:46] Stephen Brown: Yeah. Until you hit a curve.
[00:04:47] Wade Carpenter: Yep. Absolutely. I think the point of this is, number one, your speedometer on your car is we’re monitoring how fast we’re going.
[00:04:55] Stephen Brown: Mm-hmm.
[00:04:55] Wade Carpenter: And sometimes we wanna speed things up, we wanna speed things down. But if we’re not watching that speedometer, the point is we’re not paying attention to how we’re doing.
[00:05:04] Stephen Brown: Mm-hmm.
[00:05:05] Wade Carpenter: Does that make sense?
[00:05:06] Amanda Darr: Yep.
[00:05:07] Wade Carpenter: Um,
[00:05:07] Stephen Brown: I’ve been cruising own the road before and I don’t, I don’t use cruise control and I’ll look down, I’ll be honest with you. Sometimes I’m going like 80, 90 miles an hour. And that’s not good. It’s just not, it’s fun, but it’s not good. So that’s a good analogy. All right, what’s another instrument?
Tachometer – Project Efficiency
[00:05:26] Wade Carpenter: Well, I was actually gonna go into that tachometer, the RPMs that you were talking about. I know we don’t see that a lot anymore to, on these manual transmission cars, but, essentially I think of it. There’s a couple things. Me and Stephen talked about these things and maybe we disagree on how we would interpret these, but I think of the tachometer as like your project efficiency.
How fast do you, are you making money? You know, Looking at labor productivity, your gross margins, those kind of things. Are you sticking to your projects’ schedules and bringing them in on time. Does that make sense? Any comment on?
[00:06:03] Amanda Darr: Really important. I think we’ve had a few episodes about that, how to increase those efficiencies, but I think that’s an ongoing goal for most people, right.
[00:06:12] Wade Carpenter: Right. Well, obviously we want to be, this is one that, there is a red line not in your car, but honestly, we’re always striving for higher and higher efficiency. So I don’t know that there is a point of too much efficiency in a construction company. I don’t know. What do you think?
[00:06:30] Stephen Brown: Well, I think, I think just efficiency is, I don’t know exactly how your terming efficiency. But of course you want to do everything on your job as efficiently as possible to cut down on cost, to ease up the labor burden and to make your customer happy when things are running efficiently. That’s everything you want to accomplish.
Fuel gauge – Backlog
[00:06:55] Wade Carpenter: Right. Well, the next one I had on the list was basically your fuel gauge, and I think Stephen and I had these, we thought of these in reverse order, but I always think of like your fuel gauge as how much backlog you’ve got. What you’ve got in the tank to, to get you through. And I’ll, I’ll explain why with the next one, but I feel like, you can have a ton of work and backlog, but if you don’t have something to, we’ll get to the cash flow part in just a minute. But if you don’t have the right things in place running properly, it doesn’t matter how much fuel you got on board, if things aren’t working right. So does that make sense?
[00:07:31] Stephen Brown: It does, and the fuel gauge, like you said, backlog is accurate. I was thinking cash, but you know, what is the real fuel? That was my argument, that the real fuel was cash. But backlog gross profit is the profit and the work that you’ve got to do.
[00:07:52] Wade Carpenter: Okay.
[00:07:52] Stephen Brown: The backlog gross profit, you’re right, it is the gauge.
[00:07:55] Wade Carpenter: Okay. Well, again, some of the measures for that is what is the value of the backlog, the backlog to revenue ratio, the backlog growth rate? Some of those measures can be great ways to measure your construction company. And again, there is a point where, you want to have plenty of overhead covered in the next year. Stephen could probably talk about some of those ratios, but he’ll also probably tell you that there’s a point where there could be too much backlog sitting out there in your construction. And you’re asking yourself, how am I possibly gonna get that done? Does that make sense?
[00:08:29] Stephen Brown: Yeah.
[00:08:30] Wade Carpenter: Yeah. Okay. All right.
Oil Pressure Gauge – Cash Flow
[00:08:32] Wade Carpenter: Well, let me move on to the oil pressure gauge. Kinda like what you were thinking in reverse, because this is what I, I keep bringing myself to is if you can have all the, the revenue sitting in your fuel tank that you want, but if you don’t have that cash flow running running through your engine, it’s going to come to a grinding halt, right?
So that’s why I think of oil pressure as you know, the cash flow. Cash flow from operations, there’s a, several, your current ratio, your cash conversion cycle. Those kind of measures I think are great ways to think about cash flow management.
[00:09:05] Amanda Darr: Yeah, when I was thinking about this dashboard, I was thinking what are the ones that are, that a lot of the other ones rely on or are the most important? And this seems like, one of the ones that everything else won’t work unless this is working. So I think that’s why we talk about it so much on the podcast.
And we have a whole cashflow playlist on YouTube if you wanna dive more into some of those episodes as well.
[00:09:27] Wade Carpenter: Good plug.
[00:09:28] Stephen Brown: That’s the official gauge of the Contractor Success Forum, folks. You’re right, Amanda. The oil pressure gauge, official gauge of the CSF. I love it.
[00:09:38] Wade Carpenter: Okay, well, again, there is, it is hard to have too much cash flow, but there is a point where you have cash sitting around, not being useful for it. And I think some of the, the measures of this is like the cash flow from operations and how many months of cash do you have in the bank?
Those kind of things, I think.
[00:09:58] Stephen Brown: Well, and then, one, one word you love, always love to say in every episode Wade is, analysis paralysis, but you were talking about you’re sitting on a bunch of cash. It’s not flowing in or out. It’s just sitting there. And what are the problems with that? It can make you lazy. You have a whole lot of money and you’re thinking that you can ride on that for a while.
[00:10:20] Amanda Darr: Complacent.
[00:10:22] Wade Carpenter: Yeah. But typically, when I talk to you or a lot of bond agents at the end of the year, they wanna see some cash in the bank. Make sure that you’re not broke, not just working capital, right?
[00:10:34] Stephen Brown: Yeah. So, it’s a trade off, isn’t it?
[00:10:37] Wade Carpenter: Yeah.
Temperature Gauge – Risk Management
[00:10:38] Stephen Brown: Okay. So the next one you have, I’ll introduce.
[00:10:42] Wade Carpenter: Okay.
[00:10:42] Stephen Brown: Because it’s regarding risk management. That’s what I do for a living. Your temperature gauge. Your appetite for risk for a contractor is what kind of job you’re gonna take on. I have another perspective, it’s because risk management is what I do in managing risk to transfer it to insurance. But tell me Wade what you’re thinking about the temperature gauge here.
[00:11:05] Wade Carpenter: Well, exactly what you’re talking about. It goes into several different things. It goes into safety, it goes into, losses and are you doing risky jobs? It goes into a whole lot of things. But I think this is one I’d love for you to give us some measures that our listeners could maybe use to measure risks.
[00:11:24] Stephen Brown: There’s so many and there’s the location of where the project you’re gonna do, that’s considered a risk that you have to mitigate.
From our standpoint, we help contractors see where they are and where they want to be. What do you wanna self-insure? Also, in the bonding standpoint, a lot of what we do depends on the hold harmless language you sign. Do you transfer the risk to someone else on this project? All these things can be measured and all these things can be tracked. Managing risk is something we could do another 80 podcasts on as far as I’m concerned.
[00:12:03] Wade Carpenter: Okay.
[00:12:03] Amanda Darr: There are particular ratios or numbers that indicate risk that you keep an eye on or?
[00:12:10] Stephen Brown: Well, not financial ratios so much as, as the the ratios of your your labor force when it’s not working to working. The cost that you pay for insurance, whether it’s going up or going down, it’s hard to budget for insurance. How much insurance do you need or you don’t need? How much risk are you gonna take on yourself? Then you got the whole risk cash flow of a project, or are you gonna finance that project for the owner? Then you got an issue of the equipment. Do you have adequate equipment for the project? And everything else involved with keeping things moving slowly because there’s nothing more frustrating to a contractor than work stopping.
[00:12:52] Wade Carpenter: Yep.
[00:12:53] Stephen Brown: Just all of a sudden that fuel gauge, it’s just sucking fuel, cash. It’s costing you money. So that’s the main thing.
Odometer – Project and Company Milestones
[00:13:01] Wade Carpenter: Okay, well if it’s okay, we’ll move on to the next one, which I had was like an odometer. In your car, that kind of tells you how far you’ve come. And I think of that more of project milestones or milestones in your business. You could look at it on a project by project basis.
[00:13:18] Stephen Brown: Mm-hmm.
[00:13:18] Wade Carpenter: Or you could look at it like, hey, we’re X number of years in business, or, hey, we’ve built up X amount of retained retained earnings.
But sometimes these milestones are good things to go back and look at and see how far you’ve come, but also give you targets to shoot for in the future, right?
[00:13:37] Stephen Brown: Sure. That’s what we used to askour Our dad all the time on road trips when we were little, you know.
[00:13:44] Wade Carpenter: Are we there yet?
[00:13:44] Stephen Brown: How much further? Yeah. Are we there yet? And, and I’ve got my overall odometer on my car and then I’ve got a trip odometer. And the–
[00:13:53] Wade Carpenter: Right.
[00:13:53] Stephen Brown: The –overall odometer of course is showing future buyers how many miles are on the car, and also letting me gauge whether it’s maybe time to replace the car or not.
So you’re right, the trip odometer may be the individual projects and the overall odometer, but I like the idea, I don’t know where it ties on how much we’ve talked about, when you talk about the odometer shows how many miles you’ve traveled. You know how to take that data and how to analyze that as to you want company to go.
How far do you want your car to go? on how many miles you’ve got on it. That’s the same with running a construction company, isn’t it?
[00:14:36] Wade Carpenter: Throw a new engine in it and keep going.
[00:14:38] Stephen Brown: That’s right. That’s right. That’s right. I love it.
[00:14:42] Amanda Darr: That’s a great analogy.
Check Engine Light – Warning Signs
[00:14:43] Wade Carpenter: Well, let’s speaking of engines, that kind of brings me to the next one. It’s like there’s a check engine light. Some of these things, sometimes we refer to that as more of a idiot light, but um–
[00:14:55] Stephen Brown: I mean, It can mean you’re low on windshield washer fluid, or engine’s about to blow.
[00:14:59] Wade Carpenter: Yeah, exactly. So, some things you know what I’m getting at here is exactly that. Is your construction company about to blow? Are there warning signs out there that maybe something’s going wrong? And when you watch these ratios and you see the trends up and down, sometimes you can spot some of those things.
Does that make sense?
[00:15:20] Stephen Brown: Yeah. Debt to equity stands out to me as a key performance indicator that shows a lot of the bonding companies a warning sign on your engine light.
[00:15:31] Wade Carpenter: Yeah.
[00:15:32] Amanda Darr: That makes sense.
[00:15:33] Stephen Brown: I thought to myself when we were talking about this subject that Amanda, the check engine light would be all these key performance indicators. These ratios we were talking about. Because they measure so much. And we’re talking about, literally the things that a digital dashboard on a Nascar, there’s 40 different items on it. And they’re absolutely obsessed with the temperature of water, oil, fuel, just crazy stuff. The emissions from each of the exhaust pipes are carefully– they call it alpha left and alpha right. It goes on and on and on.
How do you think you should build your dashboard and should there be a different dashboard for different people in your office based on what they’re supposed to be doing?
[00:16:19] Wade Carpenter: Sometimes you could think about that. Yeah, definitely. Just holding them accountable. But yeah, I believe the same thing that, debt to equity, current ratios, some of those things that when they start to slip, it can definitely mean that maybe we should be doing something different or may need to take some more drastic measures.
[00:16:37] Stephen Brown: Okay.
[00:16:38] Wade Carpenter: Brings me to another one.
Battery Volt Gauge – Financial Stability
[00:16:39] Wade Carpenter: I came up with the battery volt gauge, which I don’t even know if they show these anymore. But you know, like I think more of, again, financial stability. Debt service coverage or the quick ratio, working capital ratios, those kind of things also show, is a company not just is it about to go out, but is it stable? Or are things going up and down and you have a good year one time and a bad year the next year. Do you have stable operations? Does that make any sense?
[00:17:07] Stephen Brown: Mm-hmm.
[00:17:08] Amanda Darr: Yeah. Ability to weather the ups and the downs.
Tire Pressure Monitor – Labor Utilization
[00:17:11] Wade Carpenter: Right. Well, I know some of the rest of these are getting a little silly, but I came up with the tire pressure monitor. They have these things, these stupid idiot lights on these cars now. But the resources in your company. Are they in check? Are we utilizing our labor right? Are we utilizing our equipment properly? Checking things like material cost variances. Does that make any sense?
[00:17:32] Stephen Brown: Yeah.
Navigation System – Strategic planning
[00:17:32] Wade Carpenter: Okay. I guess the last thing, I think more of a GPS navigation type system. That’s, having some indicators and thoughts about where we’re going with our company. And I think that more of that in like strategic planning and how we’re coming out overall. Does that make any sense?
[00:17:51] Stephen Brown: It does.
[00:17:53] Wade Carpenter: I
[00:17:53] Amanda Darr: You have Your milestones and then the GPS is what’s gonna help you those milestones.
[00:17:58] Wade Carpenter: Right. When we do strategic planning, it’s like we’re looking out and a lot of times we’ll do things like return on investment or things like that, or cash flow projections, and that’s a great indicator of what’s going on and what, where do we think we’re gonna be?
And it actually, when we put these things together, it actually spurs you to say, hey, this is what I need to hit so that I want to be this, this place in five years, whether we wanna sell out or whatever the, the measure might be. Okay.
[00:18:27] Stephen Brown: I love it and I know it’s just an introduction, so maybe we ought to do another podcast of nuts and bolts of, how to build this dashboard and, and how to monitor it. I would love to study that a little bit more. And I had an old car and the check engine light was just, it was an oxygen sensor that was an expensive pain to replace. The mechanic said just put a piece of electrical tape over that so you don’t see it. And it just drove me crazy. I was like, I, I can see it. I know it’s there. Oxygen sensing is horrible. But don’t put a, don’t put a piece of electrical tape over your warning lights, folks. I guess that’s my final comment.
[00:19:07] Amanda Darr: Good advice.
[00:19:09] Wade Carpenter: Amanda, final thoughts?
[00:19:10] Amanda Darr: Yeah, I think these are great. Maybe in another episode we could dive a little bit deeper, just because I know, especially as someone who clearly doesn’t know much about cars, I think having all of these different lights and indicators can be a little bit overwhelming. So it would be good to know which ones are the priority? How often are we checking in on all of these? And just, just how to actually set up the dashboard. Which ones are proactive versus like things that you need to react to, things like that. But I think this is great stuff.
[00:19:40] Wade Carpenter: Okay. She’s really getting this. I like her thoughts on this.
[00:19:43] Stephen Brown: Thanks Amanda.
[00:19:44] Wade Carpenter: Okay, well I guess we do need to go ahead and wrap up here, but thank you Amanda for joining us. Thank you all for listening to the Contractor Success Forum wherever you might be tuning in. Find us on YouTube channel at Carpenter CPAs or search Contractor Success Forum for more information. Be sure to check out show notes for more free resources.
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