The quickest way to grow the value of your company and to ensure it’s well positioned for growth is to manage your three financial bottom lines, namely:
1. Net profit;
2. Operating cash flow; and
3. Return on assets.
We all know the first one: net profit. It’s imperative that you measure this on accrual basis, even if your accountant is doing your taxes on a cash basis. The average contractor earns about 4 percent net profit, but the above average contractor earns 10 percent and the best of the best earns 16 percent (and higher). It’s key to measure profit on accrual basis each month, so you know if your jobs/sales are making a profit.
Operating cash flow (OCF) is not “what’s left in your check book.” Rather, it measures your ability to turn net profits on paper into actual cash in hand. In fact you should end up with more OCF than you have recorded in net profits. That’s right! Unfortunately too many contractors have the opposite problem; they make money on paper but don’t have enough actual cash to pay themselves a decent wage. Hence the reason you want to track and maximize your OCF.
Return on assets (ROA) is “profits divided by assets” and is the measure of how well you manage fixed assets like equipment and liquid assets like accounts receivable and inventory. It’s fine to buy the equipment you need, but only as long as you can derive enough profit from it in a given year. Well run companies have a high ROA and thus they are able to grow with ease from one revenue level to the next without needing such a high investment of cash.
In summary, success is not measured just by how much money you make (on paper) but also by your ability to turn it into cash and your ability to do so without requiring a lot of investments (cash, fixed assets and liquid assets).
Editor’s note: To learn how to better manage your business by the numbers, join Jeffrey Scott in his 3-part webinar series, “Managing By The Numbers,” brought to you in part by Landscape Management. Sign up by October 31 and you will receive a complimentary private financial analysis of your company performed by Jeffrey Scott.
