Can you pick just one number to use as the weather vane of your company's success? The owner of a start-up company worries most about staying busy when the current job ends, so he might choose backlog. Owners of a growing company lose sleep over meeting payroll, so they might choose cash flow. The owner of a large company frets that too much work might stretch crews too thin, so she might choose employee satisfaction.
Each of these concerns is reasonable, but the corresponding success indicators won't have value across all levels of company volume and number of employees. So, the answer to the question is: No, you can't pick just one number. But you can pick two: net profit and customer satisfaction. By itself, net profit does not predict future success. A flash-in-the-pan start-up company can produce high net profits, only to fail the next year. Happy customers, on the other hand, drive repeat business. Together, I call these two metrics the Customer Satisfaction Net Profit Index — CSNPI or “Snippy.”
Here's how Snippy works:
Set a net profit goal (something between 5% and 12% is right for most remodeling companies). Use your past history as a guide, but set a goal one or two percentage points higher than previously attained.
Measure customer satisfaction. This requires writing a simple customer-satisfaction survey that scores answers on a 1-to-5 scale. A good target score is 4.
Add the two together. Say, for example, that net profit for the first half of 2005 averaged 6%. Set a new net profit goal of 7.5%. Add that to the Customer Satisfaction target of 4, and the Snippy benchmark for the second half of 2005 is 11.5 (7.5 + 4).
Use “just one number” to focus the efforts of the entire company on doing what matters —making customers happy, and being on time and on budget — and watch the company succeed. —Judith Miller is a Bay Area construction business consultant and trainer specializing in accounting, finance, and computerization.
What's Your Number? We asked some Big50 remodelers which one number helped them most to gauge their company's health.
- Mark Scott of Mark IV Builders, Cabin John, Md., chose cash flow. “I try to keep it balanced, if not always positive,” he says. Scott acknowledges that for him, as well as for many other remodelers he knows, negative cash flow is periodically a fact of life.
- Paul Winans, of Winans Construction, Oakland, Calif., watches his schedule like a hawk. “Even if it costs you more to be on time, you will make more money because you're free to do the other jobs you planned on doing,” Winans says. He notes that the ability to get jobs done on time translates into a positive, not just for his clients and his company, but for trade contractors and everyone involved.
- John Deciantis, of Deciantis Construction, Stonington, Conn., shoots for a budgeted net profit equal to 10% of annual volume. He figures that if the company pays him a sufficient salary and still maintains a healthy net profit, everything is running well.
Profit Per In his classic book Good to Great, Jim Collins undertakes a similar quest for one number that would indicate business health. He proposes a hypothetical ratio in which profit is always the numerator, then explores several alternatives for a denominator to plug into the “profit per x” equation.
Among these alternatives are several that, with slight modifications, would work well for remodelers as indicators for specific aspects of their companies. Changing Collins' profit per employee to profit per field employee, for example, would lead to an indicator for productivity, and would also provide feedback on the accuracy of estimating and the completeness of the sales package. Swapping Collins' profit per brand for profit per job type would help identify a company's niche. Changing profit per customer into profit per returning client would help to measure the strength of a company's client base.