benchmarking: how do you stack up against your competition

WELCOME to

CBIZ MHM

BENCHMARKING:

How Do You Stack Up Against Your

Competition

Construction Industry Overview

3rd largest segment of World economy

2nd largest employer

2nd highest failure rate

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Benchmarking - Construction Industry

Construction Industry OverviewTop Five Greatest Challenges

Challenge %

Shortage of trained field help 60%

Sources of future work 16%

Healthcare insurance costs 10%

Lack of qualified project managers 9%

Financial condition of federal,state or local government 5%

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• “Business as Usual” – Pre 2008

• “Business as Usual” – Now:• Continual Improvement• Learning to perform better, faster and with fewer

resources• Staying ahead of the competition

• Benchmarking is the key to continual improvement

Definition: “Benchmarking is thecontinuous process ofmeasuring products,services, and practicesagainst the toughestcompetitors or thosecompanies recognizedas industry leaders.”

David T. Kearnes, CEO, XEROX Corporation


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As famed management thinker Peter

Drucker is quoted as saying:

“You can’t manage what you can’t

measure”

and/or

“If you can’t measure it, you can’t

improve it”

Peter Drucker - Management consultant, educator, and author, whose writings and work turned modern management theory into a serious discipline.

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• Measuring a performance against a standard

• Identify the best firms in industry and compare to them, i.e. “best in class”

• Performance measurement demonstrates whether you're achieving continuous improvement

• Like the dashboard in a car – quick way to determine the health of a business

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• Financial health examined more than ever by creditors, banks, sureties, customers, and government agencies

• Banks and sureties use certain financial benchmarks to determine whether to extend credit or bonds

• Compare metrics over time to identify trends

• Ability to spot areas that need improvement

• The desire to improve your Company’s chances for success

Why to consider benchmarking:

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In the current market, your Company’s financial health will be examined more than ever…

With so many eyes on your company’s financials, it becomes increasingly important to know how you stack up against the competition.



1. Desire to improve your chances for success

2. Start with your balance sheet and income statement

3. Calculate important ratios

4. Perform Self-Comparison Benchmarking1. Analyze current period ratio results with historical

2. Analyze current period ratio results against standards

3. Unit of measure productivity assessments

4. Comparative financial statements to look for positives and for warning signs

5. Perform Performance Benchmarking

1. Compare results with peers in the construction industry

6. Don’t forget the sureties

7. Measure Operating Performance

8. Be proactive in implementing improvement


Steps for Success:

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Four broad ratio categories:

• Liquidity - A Company’s ability to meet its short-term financial obligations on time

• Profitability – A Company’s ability to generate earnings

• Leverage – A Company’s reliance on debt to finance operations

• Efficiency – Managements’ effectiveness in operating the company

Ratios:

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Liquidity

Ratio Formula Interpretation

Current Ratio – the extent current assets are available to satisfy current liabilities

Current Assets

÷Current Liabilities

Generally, 1.0 is a minimum current ratio , which indicates that current assets at least equal current liabilities

Quick Ratio – the liquid assets that are available to satisfy current liabilities

Current Assets less Inventory and Prepaid Expenses

÷Current Liabilities

A quick ratio of 1.0 is generally considered a liquid position

Working Capital Turnover Ratio – the amount of revenue supported by each $1 of net working capital

Revenue

÷Current Assets minus Current

Liabilities

A ratio exceeding 30.0 may indicate a need for increased working capital to support future revenue

A Company’s ability to meet its short-term financial obligations on time


Profitability


Return on Assets Ratio – the profits generated by the assets

Net Earnings before Taxes

÷Total Assets

A higher ratio reflects a more effective use of Company assets

Return on Equity Ratio – the profit generated by the net assets, which reflects stockholders’ return on investment

Net Earnings before Taxes

÷Total Net Worth

A very high ratio may indicate an undercapitalized situation or, conversely, a very profitable company

Time Interest Earned Ratio– a Company’s ability to pay interest expense from operations

Net Earnings before Tax plus Interest Expense

÷Interest Expense

A low ratio may indicate an over-leveraged situation and a need for more permanent equity

A Company’s ability to generate earnings


Leverage


Debt to Equity Ratio – the relationship between creditors and owners

Total Liabilities

÷Total Net Worth

Generally, a ratio of 3.0 or lower is considered acceptable

Revenue to Equity Ratio – the level of revenue supported by each $1 of equity

Revenue

÷Total Net Worth

Generally, a ratio of 15.0 or less is considered acceptable

Fixed Asset to Net Worth – the extent an owner’s cash is frozen in the form of fixed assets

Net Fixed Assets

÷Total Net Worth

Generally, a ratio of 0.75 or higher is undesirable as a higher ratio may indicate a lack of funds for current operations

A Company’s reliance on debt to finance operations


Create a financial benchmark worksheet

Financial ratio to be measured

Formula

Interpretation

Actual calculation – ratio results

Example Worksheet – Lets Review


Steps for Success:






















SIC NAICS____

Industrial & 1541, 1542 236210, 236220 Nonresidential

Heavy & Highway 1611, 1622, 237110 to 2379901623, 1629

Specialty Trades 1711-1799 238110 to 238990

Website: www.naics.com

Contractor Classifications


http://www.naics.com/

Identify Data Sources

RMA (Risk Management Associates, formally Robert

Morris Associates)

www.rmahq.org

PAS (Personnel Administrative Services)

www.pas1.com

FMI (for customized benchmarking)

www.fminet.com

Trade Associations

Industry Focus Groups

Sureties

CFMA

www.financialbenchmarker.com


http://www.rmahq.org/

http://www.pas1.com/

http://www.fminet.com/

http://www.financialbenchmarker.com/

Financial Benchmarking Resources

www.financialbenchmarker.com


http://www.cfma.org/cfmapollFS.cfm?navItemNumber=2401

http://www.cfma.org/cfmapollFS.cfm?navItemNumber=2401

http://www.cfma.org/resources/content.cfm?ItemNumber=957&navItemNumber=600

http://www.cfma.org/resources/content.cfm?ItemNumber=957&navItemNumber=600

http://www.financialbenchmarker.com/

Create a financial benchmark worksheet

Financial ratio to be measured

Formula

Interpretation

Actual calculation – ratio results

Add column for industry average

Add column for industry best

Comments/action plan














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Average vs. best-in-class

Average is just average

Best-in-class is a goal worth achieving



Best in Class – Definition Per CFMA

Best in class companies refer to the top 25% of all survey respondents, based upon a composite ranking of the following ratios:

1. Return on Assets

2. Return on Equity

3. Debt to Equity

4. Fixed Asset to Net Worth

5. Working Capital Turnover

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Best in Class – CFMA resultsAll Companies

Ratio 2015 2014

Return on Assets 17.4% 17.3%

Return on Equity 45.5% 44.1%

Debt to Equity 1.5 1.3

Fixed Asset to Net Worth 14.9% 12.7%

Working Capital Turnover 12 9.7

2015 data generated from the CFMA 2015 published survey


Best in Class – CFMA resultsBy Category

Ratio Heavy & Highway

Industrial & Nonresidential

SpecialtyTrade

Return on Assets 15.2% 12.3% 20.7%

Return on Equity 32.5% 44.8% 46.5%

Debt to Equity 0.8 2.3 1.1

Fixed Asset to Net Worth

53.1% 11.0% 16.3%

Working Capital Turnover

9.3 20.1 8.7

2015 data generated from the CFMA 2015 published survey

Steps for Success:
























Don’t forget the Sureties


Backlog to Equity – indicates relationship of signed or committed work to total stockholders’ equity

Backlog÷

Equity

Generally, a ratio of 20 or less is considered acceptable. A higher ratio may indicate the need for additional permanent equity

Underbillings to Equity – indicates the level of unbilled contract volume being financed by the stockholders.

Underbillings÷

Equity

Usually stated as a percentage; a ratio of 30% or less is considered acceptable

Backlog to Working Capital – the relationship between signed or committed work and working capital

Backlog÷

Working Capital

A higher ratio may indicate a need for an increase in permanent working capital

Days in Accounts Receivable –indicates the number of days to collect accounts receivable

Net Receivables x 360÷

Revenue

A lower ratio indicates a faster collection of receivables, i.e., more liquidity.

Before sending your financials to the sureties, have an idea of the additional ratios they are going to be using – Efficiency Ratios:


Steps for Success:


























Operating Performance Measures:

Other half of a comprehensive overall performance measurement system

Looks at operating statistics

Can flow from financial performance measures

Provides a more detailed analysis of specific operational areas


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Example Key Operating Indicators:

Labor productivity (how many bricks can be laid in a day)

Equipment productivity (how many hours is a piece of equipment utilized)

Subcontractor performance

Vendor quality

Productivity of project managers

Jobs completed ahead of schedule (with minimal punch list)

Jobs completed with profit fade





Successful companies manage their businesses by tracking performance of their services, evaluating whether particular strategies worked well, allocating resources to drive better results, and continue to monitor to produce the best results

Steps for Success:




























Recap – Key Benefits of Benchmarking:

Focuses improvement efforts on issues critical to success

Ensures that improvement targets are based on what has been achieved in practice, which removes the temptation to say, “it can’t be done”

Provides confidence that your organization’s performance compares favorably with best practices


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The Final Recap – The Main Ingredients for Benchmarking to be Successful:

A clear understanding of what needs to be improved and why- Analysis is usually senior management’s responsibility- Must align with the company’s objectives

Careful selection of who to benchmark against

Clear understanding of the reasons for any difference in performance

Establishment of goals and targets that are both challenging and achievable with effort

A willingness to change and adapt based on the benchmarking findings

PERSISTENCE! Results will not necessarily come quickly and easily


Other Potential Warning Indicators

Cash to overbillings < 1 to 1

Average age of receivables > 60 days

Underbillings to equity > 20 %

Fixed assets to equity > 1 to 1

Average age of payables > 45 days

Debt to equity > 3 to 1

Revenue to working capital > 20 to 1

Interest bearing debt to equity > 80 %

Overhead to equity > 1 to 1

Job profit fade/slippage > 10%


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QUESTIONS

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Speakers

Please contact Joyce with any questions at:

816.945.5121 or [email protected]

Joyce Farris, CPA, CGMA

Shareholder, Mayer Hoffman McCann

Managing Director, CBIZ MHM, LLC

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Joyce, who has more than 30 years of accounting experience, serves as a CBIZ MHM, LLCManaging Director and Mayer Hoffman McCann P.C. Shareholder in the Kansas City office. Joyceis responsible for managing the entire client relationship as she coordinates the attest work withtax and consulting services. The majority of her clients are entrepreneurial-owned and privately-owned companies in the construction, real estate, and whole-sale distribution industries.

Joyce’s primary responsibility is to manage and direct the firm’s regional Construction IndustryServices Group. From the day she started with the Firm, Joyce has been involved with clients inthe construction industry from performing audits and preparing tax returns to consulting onmergers and acquisitions and transition planning. Joyce serves a variety of construction clientsincluding general contractors, heavy/civil contractors, specialty contractors, engineering firms,landscape architectural/land planning firms, home builders and real-estate developers. Herclients have local, national, and international operations.

During her career, Joyce took a leave from the Firm to pursue an opportunity as a CFO in private industry. This unique experience has provided Joyce with an in-depth knowledge of and respect for the issues affecting her clients and their respective COOs and CFOs.

Speakers

Please contact Austin with any questions at:

816.945.5235 or [email protected]

Austin Delimont, CPA, CCIFP

Audit Manager

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Austin is a Manager in the Attest division of the Kansas City office. Austin has served a variety of clientsincluding general contractors, construction managers, heavy highway contractors, specialty contractorsand real-estate developers.

He is responsible for various private company engagements for the Kansas City office ranging in size fromsmall development-stage to those with in excess of $600 million in revenue. With a heavy concentrationin construction and real-estate clients, he has specialized in construction and real-estate accounting.Austin manages the day-to-day activities of attest engagements, assists in designing the approach toaudits, and guides the field staff in their auditing efforts. He works with clients to understand theirorganization, procedures, and internal policies. Austin has provided consultation to clients on variousaccounting and reporting issues including revenue recognition, leasing, joint ventures, variable interestentities, interest capitalization and evaluation of change orders and claims.

His previous experience working in the accounting department of a construction company allows him aunique inside perspective.

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benchmarking: how do you stack up against your competition

Data & Analytics