Benchmarking: Setting standards for the industry

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The definition of and synonyms for benchmark include "standard," "point of reference" and "targets." Benchmarks provide direction and suggest a course of action.

April 01, 2004

The definition of and synonyms for benchmark include "standard," "point of reference" and "targets." Benchmarks provide direction and suggest a course of action.

I want to help propose a group of benchmarks for the remodeling industry. Taken individually, they would not qualify as targets or even goals. Instead, they would be seen in a bigger picture, as criteria that with "passing grades" for each would set a minimum bar for professionalism.

My firm tracks 25 criteria, or metrics, but a minority receive the lion's share of attention. I propose that you choose the 10 most important to you and then work on truly nailing five and making the grade with the other five.

Each of us has company and personal priorities that create different needs at different phases of our professional development. Therefore, a passing grade for one criterion might be 80% for a mature company and 40% for a new company. Companies poised for sale, applying for a huge loan or qualifying for bonding likely would need 100%. Some metrics are more important when you are struggling to survive, others when you are trying to maximize the value of being in business. Still others just keep you sane.

In the coming months, I will explain the importance of the 25 metrics listed, provide formulas for calculating them and propose acceptable number ranges, as well as target values and danger levels. I will try to show the relationships between some of these indicators, such that the advance of one might mean the demise of another, and vice versa.

Financial metrics

1. Gross profit margin

2. Net profit margin

3. Revenue earned (annual sales, measured using percentage-of-completion accounting)

4. Owner's compensation, including draws and distributions

5. Net worth/retained earnings of the business

6. Owner's retirement benefits

7. Overhead expenses (not including owner's compensation)

Marketing metrics

8. Number of qualified leads received

9.Qualified leads closed as a percentage of qualified leads received

10. Advertising and marketing dollars expended per lead

11. Average time to close a sale

12. Advertising and marketing dollars expended per contract

Work/life balance metrics

13. Number of vacation and holiday hours taken by owner

14. Hours worked each week by owner

15. Number of compensated hours (whether by the company or an outside organization) for working outside the business: taking classes, teaching, professional organizations, etc.

16. Number of personal hours taken

Performance management metrics

17. Sales per salesperson

18. Sales per management employee

19. Sales per field employee

20. Sales per each employee in the company, full and part time

21. Return on equity/return on investment

22. Current assets-to-liabilities ratio

23. Payables turnover

24. Receivables turnover

25. Total company sales costs, including marketing expenses, sales commissions and wages, and estimating and design costs, including wages

As you see fit, e-mail me in care of the editor at ksweet@reedbusiness.com with your benchmarks, whether you run a C or an S corporation, work out of your house or have an office. From there, each year when we see our final numbers, we can judge our success against standards and goals with which the professional community of remodelers is comfortable and that ensure our firm's survival.

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