Remodeling contractors often judge their success by comparing their business to other remodelers' businesses. Although there is nothing wrong with that, you may be limiting your business' success depending on which measurements you are using. You also may be misled if the information you are using about your competitors and/or peers is improperly gathered, represented, and/or interpreted. Here are two considerations to be aware of before you decide how to measure your business' success.
Do you really want to be in competition with someone else?
Many remodelers judge their success by comparing the performance of their business to industry benchmarks. Your business could benefit from the information. However, what if the businesses you are using as a comparison aren't doing that well? In that case, you're not measuring yourself against true success but rather a lower standard that I call "relative success." Think of it this way: Would you regard a crooked 2x4 as worthy just because it’s less crooked than others in the pile?
On a related note, rather than limiting your measurements to industry benchmarks, why not set your own benchmarks? Think of it like golf. Don't play solely to beat the other players in your foursome. Instead, set goals for improving certain characteristics of your game. By doing so you may not only get the best score, you might also stand out as unique in certain areas of the game—and become the benchmark by which others will measure their success.
Be careful of the benchmarks you use.
Say, for instance, you are comparing your gross profit margins to someone else's. Do you know how the other companies in the comparison separate above- and below-the-line expenses? Depending on where a business puts things such as production-related vehicle expenses and workers' compensation insurance, your direct costs go up or your overhead goes up. A business that puts these costs into overhead—i.e., below the line—will need a higher margin than that same business would have if vehicle expenses and workers' comp were considered direct job costs—i.e., above the line. I bet many benchmark reports in our industry have not clarified this difference before using the numbers collected.
Also, be careful comparing gross profit margins. Every business has a different cost of doing business. Everything else being the same; if your business offers health insurance for office staff, your margins will need to be higher than a business that does not offer the insurance. Rather than compare gross profit margins, compare your net profit margin against those of other businesses. Net profit is always measured the same way no matter what.
After all, if you are measuring financials, isn't it about how much money you keep, not how much passes through your business and where? —Shawn McCadden founded, operated, and sold a successful design/build company. A co-founder of the Residential Design/Build Institute, he speaks at industry events and consults with remodelers. [email protected]