With so much financial data at your fingertips, what are the key performance indicators (KPIs) that are most relevant in assessing your company’s financial situation?

While one KPI alone cannot be used to get the full picture of a company, there are a handful that are most commonly relied on by sureties and lenders. These are as follows:

Working Capital (Current Assets – Current Liabilities)

Working capital is a quick snapshot of a company’s ability to pay its current obligations and is one of the KPIs most frequently considered by sureties and banks. However, they will likely have some underwriting adjustments that will result in a working capital balance that is different from what is calculated from your financial statements. For example, any related-party notes receivable (ie: employee advances, receivables from an officer, etc.) will likely be excluded from the calculation, as well as any contracts receivable aged over 60 days. Inventory balances are also subject to adjustment.

Debt-to-Equity Ratio (Total Liabilities / Stockholders’ Equity)

The debt-to-equity ratio shows how much non-equity capital a contractor has used to finance its operations and the purchase of assets. A high debt-to-equity ratio may be indicative of using debt to finance losses, or to fund distributions to owners that a surety or lender may deem as “excessive.” Some level of debt is not bad and may be necessary depending on the terms of a particular contract, whether you are a subcontractor, etc. However, lenders and sureties want to ensure the debt is funding operational cash flow for a profitable business.

Accounts Receivable Turnover (Contract Revenue / Average Accounts Receivable)

This KPI demonstrates how many times during the year a company’s accounts receivable (AR) turns over and gives an indication of how long it takes a contractor to collect its AR from customers. Typically, general contractors will have a higher AR turnover than lower-tier subcontractors in pay-when-paid contracts.

Months in Backlog (Backlog / (Contract Revenue / 12))

Months in backlog provides an indication of what future revenues will look like based on the work a contractor has secured as of a certain date. This information tells lenders and sureties how far out the contractor can reasonably project, and also may be used by sureties when considering bonding a particular project (ie: are there other projects to support a particular project if the project under consideration has any cash flow risks?). Backlog is typically calculated from the contracts in progress schedule, and is equal to the total contract revenues on contracts in progress, less revenues earned to date, plus the total revenues expected for any contracts executed but not yet started.

Once you determine what KPIs to monitor, you should ensure that they are communicated to all appropriate parties. For example, if your project managers play a role in billing and/or contacting customers regarding past due invoices, discuss AR turnover with them – why it is critical to the organization and how it is impacted by their activities.

In addition, while they are inherently based on historic data, KPIs should be calculated and monitored regularly. Monitoring the trends in your KPIs is also a useful exercise, and will provide meaningful information for budgeting and forecasting activities.

If you have questions about calculating KPIs or would like to obtain industry benchmark data, please contact your local Blue & Co. advisor.