When it comes to building a company, you don't have time to be paying attention to 50 different metrics. Instead, you need to be focusing on these three core KPIs that I'm going to be talking about today, because everything else builds upon them.

When I was a CFO of a billion dollar construction company, there were three main metrics that I like to pay attention to, and I use these to determine whether or not we were being efficient in three different areas. So I call these my three efficiencies. Number one, with sales efficiency, how efficient were we at acquiring new customers and getting new projects? Number two, our operational efficiency. In other words, the return on our labor, which I'll get into here in just a minute. And then the last one, I just call it value efficiency or value creation efficiency, and this measures how efficient is management at creating firm value in the company.

I'm going to walk you through these three metrics, how to compute them, what they mean, and give you some benchmarks so you can implement this right now in your company today. All right, let's get into the first one, sales efficiency. For construction companies, what I like to do is I look at return on customer acquisition. In other words, you can do this for your company by creating a list of all the new projects or all the new customers that you've acquired this year over the last 12 months.

So right now we're in May, so you can look at the last closed period for your business. Let's just say we're talking about the end of April, and then I would go back a year. So May 1st of the prior year, 2024 through 430, April 30th of 2025, that'll give you 12 months. So I'd always look at this in a 12-month time frame.

All right, so create a list of all the new customers and the new projects that you've brought into your business. Then determine what is the gross profit that you've earned on those same customers and on those projects. Then what you're going to want to do is look at your income statement for the same period of time. And on your income statement, you want to add up all the costs associated with sales, marketing, and business development. So this is printed cost, ad spend, salaries and wages, etc. All the costs associated with acquiring new customers.

Then what you'll do is you'll take the gross profit that you earn from these new customers and divide that by all the sales and marketing spend that I just mentioned. And then this will tell you how effective is your sales and marketing function at acquiring new customers.

When I was a CFO of this construction company, we were spending, I think $2 million a year on business development. Now we were a pretty big company, so that number may vary for you, but it's important to understand not only what you're spending on sales marketing, but what is the return. And this is really critical because I have people ask me all the time, Hey Steve, how much should we budget for sales and marketing? And I tell them if they're effective at this, they shouldn't really have a budget unless they want to cap their growth.

Because think about it. If I can spend $1 on sales and marketing and I could get $3 in gross profit, why would I cap that? The problem is, is that most companies, they don't understand the return and therefore they think of it as an expense. And yes, you should cap it if you're creating a one-to-one return. In other words, if you spend $1 and then you're getting $1 in gross profit. Yeah. I mean, that's not very smart to just continue to scale like that because you're not going to make any money.

So here's some benchmarks for you for this ratio. Remember it's gross profit from new customers divided by all the sales and marketing spend to acquire those customers. It's going to give you a ratio. If you're below two to one, you have to fix this because you're just going to be burning through money. You're going to be doing more sales and marketing, burning out your team and not getting the returns that you deserve.

I like a baseline of three to one. That's just me. That was always my target is just three to one. If I spend $1 in sales and marketing, I want $3 in gross profit, new gross profit. That is now healthy and scalable is three to five. And if you're above five in the construction industry, so if you're five to 10, that means you are operating as best in class. You have a highly efficient sales engine, which is producing high margin repeatable or referral driven work.

So that's great. So that's the first metric that I like to look at. Oftentimes in my other content, I talk about this as LTGP to CAC. So if you're in construction and you're doing recurring revenue, reoccurring, right? You're doing service-based revenue, for example. And let's just say you have customers that use you over and over again. Then you could look at the lifetime gross profit of these new customers and compare that to your customer acquisition costs.

So I'd say LTGP, lifetime gross profit of a customer to CAC. If you're just going out there and bidding work and completing a project and then you don't do anything else for that client for years, then you may just want to look at the gross profit in that given year. So that's the only difference that I'm referring to. I say LTGP when your customers actually have a lifetime that's greater than one year. Otherwise, you can just look at the gross profit for that new customer in the given year and compare that to your total sales marketing spend.

All right. So that's the first metric. And like I said, that helps me to measure sales efficiency.

All right. Number two, the second metric is to measure operational efficiency. And the biggest cost in construction and service-based businesses is labor. All right. So you want to measure your return on that labor spend.

So what you're going to do is you're going to go to your income statement and go to the very bottom, not the very, very bottom where you have net income or income before taxes. I want you to go up a few lines because I want you to exclude other income and other expense. And instead, I want you to look at operating income. That's the amount of profit you earn from normal operations, from your core operations.

In other words, that's why we're excluding other income and other expense. You don't want to add in interest income or income from a gain on a sale of a piece of equipment, et cetera, unless you're in the business of lending out money and selling equipment. But for the majority of us, we're not. So you want to exclude those other items and just look at operating income.

So you have your operating profit, operating income, same thing. Then what I want you to do is convert your operating profit to a net number. And I mean net of taxes.

If you're LLC or you're an S corporation in the United States, your entity does not pay corporate taxes, but you do. As a business owner, you pay taxes because that taxable income shows up on your K1 and you pay it on an individual level. What gets complicated here, but it doesn't have to be, I'm going to just tell you a very simple way to do this, is when you have multiple owners.

So if you have multiple owners or partners in a business, everybody has their own tax basis, their own effective tax rate, in other words. So trying to figure out everybody's tax rate and coming up with a blended tax rate is just a waste of time. So instead, let me just tell you this.

If you're an individual owner, you could go to your tax return and you can figure out your effective tax rate and then use that tax rate to do the math here that I'll explain in just a minute. Or if you want to just keep it simple, I use 30%, right? 30% for an effective tax rate. If you want to go higher, you want to be more conservative, use 35, right? But that's the percentage we're going to be talking about here.

So take your operating profit, then multiply it by one minus your tax rate. So if your tax rate is 30%, you're going to multiply your operating profit by 0.7, 70%. All right. And that will give you your net operating profit after tax, because we want to account for the taxes that theoretically the business will be paying, even though the business isn't paying taxes, because you're paying taxes, but somebody's paying taxes and we have to account for it. Otherwise the numbers are going to be skewed.

Okay. So that's net operating profit after tax or NOPAT. Okay. So you're going to take NOPAT and then you're going to divide that by your total labor spend.

So on your income statement, you're going to figure out all the costs associated with your labor. And I would say all labor. So your cost of goods sold labor and your operating expense labor, all your labor, the entire labor pool of your company. In other words, I repeat that because you don't want to just include your overhead labor. You want to include your field labor as well.

Then you'll take NOPAT divided by your total labor spend. And let me just clarify here too, it's salaries and wages and all the labor burden associated with that labor. So it's your payroll taxes, it's your PTO, it's your benefits that you pay out to your employees. It's all those labor costs.

So you take NOPAT divided by your total labor spend, and that will give you your return on labor. Now, if your return on labor is negative or close to zero, obviously that means your business is at risk. If you're less than 15%, you need improvement.

15 to 30% is it's okay. 30 to 50% is strong and best in class is over 50%. So do the math in your business, and then you'll be able to benchmark yourself against where you should be to determine if you're efficient with operations.

But if you're not earning a return on your labor greater than 30%, I'd say there's serious room for improvement. And if you improve this, if you make your labor more efficient, guess what? You're going to have more profit and you're going to have more cashflow. You're not going to be using your line of credit as much. You're not going to be worried about putting money back into the company because you have a machine that number one, produces new customers. That's your sales efficiency. And you're able to do the work, your operational efficiency and make money.

All right. The last metric is return on invested capital, ROIC. Don't worry. It's not as scary as it sounds. This is what you're going to do. You're going to take that NOPAT number that you used in the last calculation, your net operating profit after tax. And you're going to divide that by your invested capital.

So if you take your net operating profit after tax divided by your invested capital, it's going to give you your return on invested capital. And what this number tells you is what are you actually returning in your business based on all the money you have tied up in your business, all the money you've invested in your business in working capital and your net property, plant, and equipment.

Here's the deal. The stock market in the United States over the last 50 years, let's just say it's returned on average between 9 and 10%. We'll just say 10%. Therefore, if your return on invested capital is less than 10%, you're almost better off, I'm not saying shut down your business and do this, just follow along with me. You're almost better off just putting your money in the stock market, right? Because you can just invest in an index fund, in the S&P 500, not deal with all the headaches of a business and earn 10% over the long term.

So if you're less than 10%, I would say your business is underperforming. If you're above 10%, let's say 10 to 15%, you're doing pretty well, you're doing pretty decent. If you're above 15% and you're operating more in the 20% range, I would say you're operating pretty well and you have a strong ability to create value in your firm.

So those are the three metrics that I paid attention to when I was CFO of multiple construction companies. And also I pay attention to them right now as I help to grow and turn around businesses. And you can calculate these things too. I know it's kind of hard to follow when you're listening to this on a podcast, but ideally you go back to your office and you follow along with what I'm saying and you pull the financials so you can do the math right there. Or if finance isn't your thing, give it to somebody in your finance or accounting department so they can run the numbers too to determine how well you're doing.

Okay, if you need help with this, if you ever want me to look at your financials, happy to do that and give you a second opinion. You can find out more and connect with us at coltivar.com. But yeah, do this in your company, your eyes will be open and you'll know exactly which efficiency you need to focus on. And remember, there's sales efficiency, operational efficiency, and value efficiency.

All right, all the best until next episode. Take care of yourself. Cheers.