Effective financial management is the cornerstone of success in any industry. This is particularly true in industries like construction, where substantial and frequent upfront investments are the name of the game. Accounting teams rely on metrics to make informed financial decisions that mitigate risk and drive sustainable growth in such environments. But, what exactly are financial metrics, and which ones are worth the effort of tracking? You’ve come to the right place.
What are financial metrics, anyway?
Financial metrics are quantifiable measurements that are used to gauge a company’s financial performance. These metrics are particularly critical for subcontracting businesses because they provide insights into a company’s profitability, solvency, efficiency, and liquidity. They help accounting teams:
- identify economic trends;
- compare their performance against previous years’ and industry benchmarks; and
- make informed decisions about future investment strategies.
In other words, tracking the right financial metrics is like using road signs and mile markers to navigate your business down the most efficient path toward your goals.
How do you determine which financial metrics to monitor?
This is always the big question, as there are multitudes of financial metrics out there—many of which go by different names. The truth is that there’s no one-size-fits-all list of metrics for assessing financial health and performance. It requires a deep understanding of your business operations and objectives, coupled with research and some trial and error, to discern which metrics provide the necessary information for prosperity. (We go into more detail on this process in our comprehensive metrics guide.)
However, this doesn’t mean you’re completely in the dark.
What are the top five financial metrics for subcontractors?
To help light the way, we’ve compiled this shortlist of financial metrics that subcontractor billing teams simply can’t afford to ignore. This list is derived from our “16 Must-Track Financial Metrics for Subcontractors” guide, which was developed after scouring a wide range of financial resources geared toward the construction industry. Let’s dig in.
1. Net Profit Margin
At the top of our list is net profit margin, as this metric provides a comprehensive view of a company’s overall profitability after accounting for all operating costs and the costs of goods sold (COGS). Net profit margin is typically expressed as a percentage of sales (the percentage being the actual amount of profit each earned dollar yields).
Formula for calculating net profit margin is: Net Profit Margin = (Revenue – COGS – Interest – Tax) / Revenue x 100
This is an essential one because it shows what your business is clearing after expenses. Basically, the higher your company’s net profit margin, the more money it’s making. If you notice a decrease in your net profit margin, it's possible that operational inefficiencies or rising costs are to blame. (The latter may be a signal that it's time to raise your own prices.)
COGS vs. Operating Expenses
Though both of these components impact net profit margin, there are some key differences worth mentioning to ensure you’re calculations are accurate.
COGS
- Directly covers the costs of materials and labor for project execution
- Varies by project
- Informs project pricing and efficiency
Operating Expenses
- Covers expenses like rent, utilities, admin costs, sales, and marketing
- Typically fixed costs
- Informs broader organizational and spending decisions
2. Net Cash Flow
Cash flow is all the money moving in and out of your company (or a project) over a specific period of time.
Formula for calculating cash flow: Net Cash Flow = Cash In (Over a Given Period) – Cash Out (Over a Given Period)
Reviewing cash flow is a great way to measure the short-term financial health of your subcontracting business as it serves several important purposes:
- Tracking revenue sources: It provides a comprehensive view of where your company’s cash is coming in—where it might be drying up.
- Identifying potential cash shortages: A negative cash flow means your company is spending more than it’s earning. This isn’t always a cause for concern, particularly if your company is in the early stages of a significant growth phase, but it still warrants attention to prevent future shortfalls.
- Predicting future cash flow: By regularly assessing your company’s incoming and outgoing funds, you can better predict its future cash position, aiding in proactive financial planning.
3. Working Capital
Working capital measures a company's short-term liquidity and its ability to meet financial obligations.
Formula for calculating working capital: Working Capital = Current Assets – Current Liabilities
Since subcontractors are always forced into negative working cash cycles, maintaining a healthy working capital is paramount for sustaining operations and successfully completing projects. Keeping a pulse on working capital also helps identify potential cash shortages, helping your team make smarter decisions to strengthen cash flow.
Current Assets vs. Current Liabilities
Here’s a handy checklist to help you distinguish between current assets and liabilities.
Current Assets
- cash on hand
- accounts receivable
- materials and supplies for ongoing projects (a.k.a. inventory)
- work in progress
- retainage receivables
Current Liabilities
- accounts payable
- accrued expenses (e.g., wages, utilities, interest)
- short-term debt
- billings in excess of costs
- contract retainage payable
4. Days Sales Outstanding (DSO)
Days sales outstanding (DSO) measures the average number of days it takes a company to collect payments. This metric directly informs accounts receivable (A/R) aging.
Formula for calculating DSO: DSO = Accounts Receivable / Credit Sales x Days in Period
Monitoring DSO helps you quickly ascertain who’s paying you the fastest—and, more importantly, who’s paying you the slowest. With this information, you can take proactive steps to retrieve outstanding revenue and reassess future relationships with notoriously slow-paying general contractors.
5. Cost Variance
Cost variance compares the actual costs incurred on a project with the budgeted costs for that project. Basically, it helps teams determine whether the project is within the planned budget.
Formula for calculating cost variance: Cost Variance = Actual Costs – Budgeted Costs
Significant variances between actual costs incurred and budgeted costs are a clear sign that the project's cost estimation or management is not going according to plan. Therefore, regularly monitoring cost variance allows you to quickly identify areas where actual expenses have deviated from the original plan—and make the necessary adjustments to bring the project back on track.
Looking for more metrics expertise?
You’re in luck! Our “16 Must-Track Financial Metrics for Subcontractors” guide contains detailed insights about how each metric can enhance performance and secure your position as a leading subcontractor in your area. It also includes the specific formulas needed to calculate each metric, along with tips for identifying and prioritizing the most relevant metrics for your business needs and goals.
Take your performance tracking to the next level with centralized software—like Siteline—that integrates subcontractor billing data into customizable reports and dashboards to easily monitor things like DSO, backlog, and project efficiency. With this financial intelligence at your fingertips, you can make smarter decisions that will improve your company’s bottom line.
Sound up your alley? Schedule your Siteline demo today, and let’s explore how this powerful solution can help you achieve your most ambitious goals.
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