- Gross Profit Margin
You can't afford to be a civil contractor if you don't understand your gross margin. It has the potential to make or break your company. It's critical to ensure that you're bidding on projects in a way that captures the correct pricing and allows you to calculate a consistent gross margin on each project.
What exactly is a gross profit margin? It is the amount of money a company makes after deducting the cost of goods sold or other direct costs from sales revenue. You analyse the gross profit margin per financial period i.e. a month and cumulatively for the financial year.
The higher the gross profit margin percentage, the more money your company earned from its work because you incurred smaller direct costs to sell your work. If you're not sure what your gross margin should be, look up industry benchmarks to see the industry average.
The formula looks like this:
Gross Profit Margin = (Sales – Direct Costs) ÷ Sales
So, in this formula, two variables influence the outcome: sales and direct costs. If your margin is lower than the industry benchmark, then your sales turnover is too low, your prices are too cheap, or your direct costs are too high.
Sales results from how much you billed your clients for your work during the financial period you are examining. Direct costs on the other hand are all job costs for the period, such as labour of your employees that worked on projects, external labour-hire, purchased materials, purchased services and subcontracts, own equipment usage or hired equipment costs. Those may be simple to trace as an owner-operator. However, as your company grows and hires more employees and subcontractors, and the value and complexity of your projects increases, as well as the number of projects, grows, maintaining a healthy gross margin becomes more important, and at the same time, more difficult to track. This is when Workbench software will help you with the tools you need to track your costs accurately every time.
- Net Profit Margin
Net profit margin is a figure to keep a watch on because you can use it to see how much money you are making. From this number, you are able to see how well your business is doing and if it’s time for new pricing, or maybe an increase in sales.
Net Profit Margin = (Sales – Direct Costs – Overheads – Interest – Taxes) ÷ Sales
What are overheads? Overheads are costs that cannot be allocated directly to a project, such as rent of office space, salaries of management, admin, and business development staff, utility costs, mobile expenses, plant and equipment leases, insurance, repairs and maintenance.
- Net Cash Flow
Net cash flow is a measure of how much money flows through a business in a given period of time. To figure it out, add the amount of money that enters the business during a given period to the amount that leaves during the same period.
Net cash flow figures are positive indicators that the company is bringing in more money than it is spending. Note: that doesn’t automatically mean that you make a good profit.
A negative nett cash flow indicates that your company spends more money than it receives. This is usually a red flag that your accounts receivable are in trouble. If receivables aren't being collected, it's a good idea to step up collection efforts.
Net Cash Flow = Cash Inflows – Cash Outflows
Cash inflows are the money your customers pay you for your services. Cash outflows occur when you pay salaries and wages to your employees, when you pay rent, when you purchase equipment, as well as the interest payments your business is required to make on a loan or leasing of equipment, and when you make other payments to suppliers.
- Working Capital
The primary difference between cash flow and working capital is the financial story they tell about your business. Working capital is an indicator of a company's ability to meet its short-term financial obligations, whereas cash flow describes the money flowing into and out of your company over a specific time period.
Working Capital = Current Assets – Current Liabilities
Cash in the bank and accounts receivable are examples of current assets. Accounts payable and short-term loans are examples of liabilities. The higher the figure for working capital, the better the company's financial health.
A contractor with negative working capital does not have enough cash on hand to pay their current bills. A construction company with negative working capital needs money as soon as possible. Bank loans could be viable options. When making lending decisions, banks and financing companies will take this KPI into account.
- Project Cost Variance
The cost variance of a project can be calculated by subtracting the actual cost from the planned budget. This can be calculated at any time throughout the project.
Cost Variance = Estimated Cost – Actual Cost
Project managers will divide the project into scopes, stages, work areas, and so on, to see how each is progressing in relation to its budget. If a project or item exceeds its budget, it is a good idea to look into why and drill down into each item to get to the bottom of it.
Construction estimators and project managers can use the cost variance of one project as a learning opportunity for the next. Workbench can help with discussing this KPI and its reporting in the system.
- Project Planned Hours vs Actual
Simply compare your original estimate of the hours needed to complete the project's stage, work area, and so on, with the actual number of hours spent at any point in time. This will assist you in determining the accuracy of your initial estimates, which should improve with practice. Aside from that, keeping accurate records of both time allocation and completion time is critical because these records can be used to justify delays and variations. In addition, in fixed-price projects, an increase in hours can be the first sign of a cost overrun.
Hours Variance = Planned Hours – Actual hours
When labour costs exceed the budgeted amount for a project, it can eat into your profit margin. If this is the case, look into what caused the overage and how it can be avoided in the future. It is important to note that a budget overrun can be caused by a change in project scope rather than being overspent. For example, if your client requests new work after the project has started, it will necessitate additional hours. If this happens, create a variation order to include the new feature in the scope of work and adjust the final price accordingly.