In the hustle and bustle of managing a building business, it can be easy to get lost in the day-to-day operations and lose sight of the bigger picture. However, it’s crucial to have a clear understanding of your business’s financial health to make strategic decisions. Key Performance Indicators (KPIs) can help builders and tradies to track performance and ensure their business is on a solid footing.
Gross Profit Margin is the profitability measure after considering the Cost of Goods Sold (COGS), which includes direct labour and direct materials used in producing or providing your service. It’s a critical metric to monitor because it shows how efficiently your business can produce and sell products or services. In the building industry, your GP Margin should ideally sit at around 25%. This means for every dollar of revenue you bring in, 25 cents is gross profit.
While Gross Profit Margin focuses on direct costs, Overheads as a percentage of Revenue concerns the indirect costs of running your business. This includes expenses like office rent, administrative staff wages, insurances and marketing costs. For a residential builder, Overheads should ideally be in single figures. It might not be as significant as GP, but it’s one to keep an eye on – particularly if it goes well above 10%.
Moving further down the Profit & Loss statement, we arrive at the Net Profit Margin. This is your remaining profit after all costs, including Overheads, have been deducted from your Revenue. For residential builders and tradies, Net Profit should be 10% or more. Regular tracking of this KPI ensures your business is profitable and sustainable – and you’re actually making a decent return for all your effort.
While not technically a KPI, WIP is a number that builders absolutely need to know and to get right. Without it, you won’t be able to see your true profit performance. For more insights on how to manage and track WIP, check out our WIP masterclass.
If you hold a QBCC Licence, there are two more KPIs you need to be aware of:
These are the total assets owned by your business (less intangible assets which include such things as trademarks, borrowing costs, patents, and goodwill). Your NTA determines the maximum amount of revenue you can turnover in the financial year.
This ratio measures your short-term liquidity, or ability to meet short-term debts. It’s calculated by dividing your current assets (e.g. cash, accounts receivable, stock, Work In Progress) by your current liabilities (e.g. outstanding bills, trade creditors, tax obligations). Current assets and liabilities are those amounts that will fall due within the next 12 months. Your total current assets need to be greater than your total current liabilities to meet your current ratio requirements.
In the building industry, managing various responsibilities can often be overwhelming, and understanding the complexities of financials and KPIs might add to that stress. However, these factors shouldn’t be burdens. Instead, they should be tools guiding you towards success.
It’s not merely about identifying and tracking the right KPIs; it’s also about establishing robust systems and reporting mechanisms. The value lies in turning raw data into a comprehensive, easy-to-understand snapshot of your business’s financial health.
If you’re finding it challenging to set up these systems or if you’re unsure about how to interpret your data to make strategic decisions, it might be time to seek help. Getting your financial data in order is not just about better record-keeping; it’s about building a more resilient, sustainable business.
Making informed decisions about the future requires understanding your numbers, but you don’t have to do it alone. We’re here to help interpret your data, assist you in setting up effective systems, and ensure you’re focused on the most relevant KPIs.
Feel free to contact our CFO Advisory team. We’re here to help turn your numbers into knowledge, empowering you to make informed decisions that will drive your business forward.
