BizScore Contractor Example For the period ending 12/31/2009 Provided By www.bizscorevaluation.com 919-846-4747 bizscore@gmail.com Page 1 / 11
This report is designed to assist you in your business' development. Below you will find your overall ranking, business snapshot and narrative write-up. Snapshot of: Contractor 23822 - Plumbing, Heating, and Air-Conditioning Industry: Contractors Revenue: $1M - $10M 12 months against the same 12 months from the previous Periods: year Financial Score for Contractor Sample LIQUIDITY - A measure of the company's ability to meet obligations as they come due. PROFITS & PROFIT MARGIN - A measure of whether the trends in profit are favorable for the company. SALES - A measure of how sales are growing and whether the sales are satisfactory for the company. BORROWING - A measure of how responsibly the company is borrowing and how effectively it is managing debt. ASSETS - A measure of how effectively the company is utilizing its gross fixed assets. EMPLOYEES - A measure of how effectively the company is hiring and managing its employees. INDUSTRY-SPECIFIC PERFORMANCE RATIOS What are the Key Performance Indicators for the business? This section of the report provides Key Performance Indicators (or KPIs) for the business being analyzed. A KPI can be either a financial or a non-financial metric, but it is typically a number or ratio that is easily obtained and tracked by the business as an early indicator of how well it is performing. The ratio calculations, graphs, and benchmarks displayed below are specific to the particular industry this business operates in. Tracking these KPIs over time as a trend and also as they relate to the industry comparison benchmark can help lead to more effective management of the business, although it is important to be aware that a KPI may Page 2 / 11
be more of a rough measure of effectiveness than a precise indicator. Billings in Excess of Cost to Total Assets = Billings in Excess of Costs / Total Assets Costs and Earnings in Excess of Billings to Total Assets = Costs and Earnings in Excess of Billings / Total Assets Months in Backlog = (Backlog / Sales) * 12 Page 3 / 11
Direct Labor Ratio = Direct Labor / Sales Direct Materials to Sales = Direct Materials / Sales Financial Analysis for Contractor Sample LIQUIDITY A measure of the company's ability to meet obligations as they come due. Operating Cash Flow Results The company is generating solid, positive cash flow from operations at this time, and cash flow relative to sales has even improved from the prior period, which is excellent to see. These are very good results. It is particularly nice to see parallels between cash flow and profits: both appear to be quite strong, currently. Typically, results such as these demonstrate effective management of both the Balance Sheet and Income Statement, at least with regard to cash. General Liquidity Conditions Despite slips in the current and quick ratios this period, the company's liquidity position is still excellent. This position looks healthy even compared to the competition. This analysis is based on an examination of the financial data of other similar companies. Though it would not be desirable to lose liquidity over time, temporary slips are not typically a problem. However, liquidity is a quickly changing indicator that can move from strong to weak very easily. It is interesting to note that this company's position shifted down in conjunction with downward movement in profits and net margins. It would be important to identify the reasons for slipping liquidity conditions as well as the slips in Income Statement performance. It is important to know the causes of a company's successes as well as its weaknesses in order to maintain strong performance and to stop negative trends before they become problematic. The current ratio this period is 5.28. It is always positive when the current ratio of a company is strong and Page 4 / 11
its accounts payable days ratio is low. A lower accounts payable days ratio typically (not always) means that vendor accounts are being satisfied in a timely manner. Yet, one (days) ratio that could be an issue is the inventory days ratio, which is high for this company. Inventory days measures the amount of time it is taking the company to convert inventory to sales. If inventory is a large part of the business and its Balance Sheet, we would want this key metric to float downwards over time. Tips For Improvement Here are some ideas/actions that managers might consider in managing liquidity: Complete jobs on a timely basis because penalties and lost business elsewhere can start to drain income. Speed up the billing of customers (even three days earlier each month) in order to accelerate the collection process which can significantly improve the business's cash position. Monitor invoicing procedures to help ensure correctness in order to reduce delayed payments from customers. Monitor Accounts Receivable on a weekly basis and charge interest on invoices that are past due. LIMITS TO LIQUIDITY ANALYSIS: Keep in mind that liquidity conditions are volatile, and this is a general analysis looking at a snapshot in time. Review this section, but do not overly rely on it. Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is. This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger the company. Page 5 / 11
This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric. The lower the better. This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. The lower the better. This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better. Page 6 / 11
PROFITS & PROFIT MARGIN A measure of whether the trends in profit are favorable for the company. The results in this area are favorable, even though it is usually not favorable to see lower net profits and lower net profit margins during the same period. The company's net profit margins are still strong, although they have fallen from last period when they were very good. This means that the company has a healthy profit margin compared to other similar businesses -- one that should allow for strong growth in the future. It is good that the company has been able to achieve a strong net profit margin -- this is the most important Income Statement ratio, because it measures how effective the company is at controlling its costs relative to its sales revenue. Clearly, the company will not want to see lower profits continually over the long term. In order to stabilize or get profits moving higher again, the company can pursue healthy sales increases in the future. In addition, companies should always monitor the investments they make in expenses. Even slightly higher costs in relation to sales can hurt profits over time. Currently however, even though the company is not as effective in turning sales dollars into profits as last period, it is still very strong overall and relative to similar companies. Tips For Improvement Good profit managers make continuous and small adjustments to improve their businesses. Managers might possibly consider the following to improve profits over time: Compare the business to other local contracting businesses and work to meet and exceed industry standards. This can help improve the business's competitive position and retain customers who might be seeking an alternative contractor. Be sure to subscribe to and READ the trade journals that are relevant to the plumbing, heating, and air-conditioning contractor industry. These publications include many valuable ideas that can help managers increase sales and keep customers. Create good monthly budgets with cost reduction goals, broken down by account, that are put right into an accounting system (chart of accounts) allowing management to have the ability to pull "variance reports". Monitor the amount of money that is being used for activities unrelated to the business. This number indicates the percentage of sales revenue that is not paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates how many cents of gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more efficient). Page 7 / 11
This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts. The higher the better. This metric shows advertising expense for the company as a percentage of sales. This metric shows rent expense for the company as a percentage of sales. Page 8 / 11
This metric shows G & A payroll expense for the company as a percentage of sales. This metric shows total payroll expense for the company as a percentage of sales. SALES A measure of how sales are growing and whether the sales are satisfactory for the company. It is apparent that the company's sales volume has stayed approximately the same as last period, but there are some less obvious results to consider here as well. The lack of sales growth coincided with an increase in the company's fixed asset base. Therefore, the company is now driving fewer sales dollars through each asset dollar on the books, which is an undesirable result if continued over the long run. Right now, the company is "turning" assets less effectively than last period. Perhaps the newly acquired assets need some time to start generating additional sales, or will just affect profitability, and not sales directly. Managers inside the company will want to look at these questions. On a more positive note, the company has lowered its employee base, so the firm is now driving more sales through each employee. This is a favorable short-term trend. The conclusion (in terms of sales only) is that the company has managed its employee base better than its assets during this specific financial period. BORROWING A measure of how responsibly the company is borrowing and how effectively it is managing debt. The company has approximately the same level of debt as last period, but net profitability fell by 6.55%. This means that a lower level of profitability is being moved through each dollar of debt on the books, which is not Page 9 / 11
a favorable result. In addition, overall liquidity and the net profit margin fell, too. It is important to monitor future performance to make sure that this dynamic does not develop into a trend that may become more bothersome. The trend between profitability and debt is an important one, especially when the company has a relatively high level of debt on the books. Notice that this firm's debt-to-equity ratio is high, even relative to its industry. Higher levels of debt mean that managers are using debt as a tool in the strategic planning function. Still, it does need to be noted that the company is generating earnings in the "normal range" as compared to interest payments, so analysis needs to be deliberate (this report cannot go too far with conclusions in this particular case). In summary, the trend here is worse than the raw score; managers should watch future results closely. Depending on performance in the asset management section, now may be a good time to consider reducing any underproductive assets and associated borrowing if profitability continues to fall. This action, if carefully planned out, could drive the use of assets higher and lower overhead. This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better. Page 10 / 11
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