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CBIZ & MHM Executive Education Series™
Benchmarking for Contractors
Presented by: Anthony M. Hakes, CPA
Anthony R. Stagliano, CPA
July 22, 2014
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Before We Get Started…
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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.
External participants will receive their CPE certificate via email immediately following the webinar.
CPE Credit
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The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
Disclaimer
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Today’s PresentersAnthony M. Hakes, CPA, CCIFPShareholder, MHM602.650.6225 | ahakes@cbiz.comTony is an MHM Shareholder and CBIZ director in the Phoenix office and
leads their Construction Industry Services Group. Tony services a variety of client including general contractors, home builders and real estate developers. He has provided consultation to clients on various accounting and reporting issues including revenue recognition, joint ventures, leases, variable interest entities and evaluation of change orders and claims. Tony is also a designated Certified Construction Industry Professional (CCIFP).
Anthony R. Stagliano, CPA, CCIFPShareholder, MHM610.862.2410 | tstagliano@cbiz.comTony, based in our Philadelphia office, is the Managing Practice Leader of the Construction Industry Group and has over 35 years of experience exclusively with construction and real estate industry clients. He specializes in providing attest, tax and consulting services for contractors and is recognized nationally as a leading expert in construction industry financial management. He is active in several construction associations. Tony is a Certified Construction Industry Financial Professional (CCIFP).
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Today’s Agenda
1
2
Overview and Background
Financial Benchmarking
Operational Benchmarking 3
4 Questions
OVERVIEW AND BACKGROUND
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What is Benchmarking?
Definition: “Benchmarking is the continuous process ofmeasuring products,services, and practicesagainst the toughestcompetitors or thosecompanies recognizedas industry leaders.”
David T. Kearnes, CEO, XEROX Corporation
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Embracing Benchmarking
Wanting to improve your chances for success Analyzing your financial statements looking for warning
signs Start with your balance sheet and income statement Calculate important ratios Compare results with peers in the construction industry Be proactive in implementing improvement Innovation the key component of top performing
companies Innovation requires commitment & paradigm shift
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Performance Planning Process
Responsibility of top management Understand your company’s purpose The overriding goal equates to success for the company Goal must be attainable and achievable Goal must be formally forecasted and measured Compare yourself to competitors
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Principal Types of Benchmarking
Process benchmarkingFunctionalBest practices
Self-comparison benchmarkingInternalBaselines
Performance benchmarkingCompetitive“Best-of-class”
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Self-comparison Benchmarking
Benchmarking without action is just keeping score
People attempt to perform at higher levels if their performance is measured
How do we compare against ourselves (last year, last job, etc.): Comparative financial statements Closed job analysis Historical ratio analysis Unit of measure productivity assessments
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Measuring Performance
Use reliable financial data A system of accurate job cost data Timely and readily available
financial and job cost data
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Financial Ratios
Liquidity Ratios Profitability Ratios Leverage and Performance Ratios Efficiency Ratios
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Liquidity Ratios
Current Ratio Quick Ratio Days in Cash Working Capital Turnover
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Profitability Ratios
Return on Assets Return on Equity Return on Sales Gross Margin Times Interest Earned Gross Profit in Backlog
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Leverage and Performance Ratios
Debt to Assets Debt to Equity Interest Bearing Debt to Equity Annual Principal Debt Service Annual Revenue Increase Cash to Overbillings Underbillings to Equity Revenue to Working Capital
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Leverage and Performance Ratios
Revenue to Equity Overhead to Equity Job Profit Fade/Slippage Backlog to Equity Months in backlog General and Administrative Expenses to Revenue Equity to General and Administrative Expenses
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Efficiency Ratios
Backlog to Working Capital Months in Backlog Asset Turnover Fixed Asset Ratio Days in Accounts Receivable Average Age of Receivables Days in Inventory Days in Accounts Payable Average Age of Payables Operating Cycle
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Operating Performance Measures
Other half of a comprehensive overall performance measurement system Consists of operating performance measures Looks at operating statistics Flows from financial performance measures Provides a more detailed analysis of specific areas
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Key Operating Indicators
Labor and equipment productivity Subcontractor performance Vendor and customer quality Financial and job cost reporting performance Jobs completed ahead of schedule or with minimal
punch list items Cost of processing certain types of transactions Cost of performing contracts on certain sized jobs Productivity of project managers and crews
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SIC NAICS____
Industrial & 1541, 1542 236210, 236220 Nonresidential
Heavy & Highway 1611, 1622, 237110 to 237990 1623, 1629
Specialty Trades 1711-1799 238110 to 238990
Website: www.naics.com
Contractor Classifications
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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
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Financial Benchmarking Resources
www.financialbenchmarker.com
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Compare Against Best-in-Class
Average vs. best-in-class Average is just average Best-in-class is a goal worth achieving Top 25 percent of most profitable firms Set strategic goals
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Identify Areas for Improvement
Create a financial benchmark worksheet Financial ratio to be measured Formula Best-in-class/benchmark ratio results Your company’s ratio results Comments/action plan
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Analytical Review and Reasonableness
Resources are available Puts company in best position to succeed Should be part of year end engagement Great opportunity to impress credit grantors
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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 % Annual principal debt service > depreciation
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Potential Warning Indicators (cont.)
Overhead to equity > 1 to 1 Annual revenue increase > 50% Job profit fade/slippage > 10% No cash No interest income Current ratio deterioration Losses for 2 or more consecutive years Backlog to trailing 12 months revenue Largest job > 150% of previous largest job
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Potential Warning Indicators (cont.)
Overhead increase % > Revenue increase % Accts. receivable from officers or related parties Real estate development activities Purchase of restaurant and/or golf course
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Questions?
Q&A
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Join us for these courses: 7/24: Second Quarter Accounting Update 8/14: Revenue Recognition for the Construction Industry 8/26: Revenue Recognition for the Construction Industry
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