Profit, Cash, and Control: The KPIs That Drive Smarter Decisions

Introduction - KPIs Profit, Cash, and Control

For construction and engineering businesses, making big decisions isn’t just about gut feel, it’s about numbers. Whether you’re considering hiring more staff, buying new equipment, or bidding on a large contract, the wrong move can drain cash and margins overnight. The problem is, many SMEs focus on the wrong financial signals, like just checking the bank balance, and miss the bigger picture.

Today, we’ll explore the key KPIs (Key Performance Indicators) that really matter when you’re steering your business through major decisions.

1. Gross Profit Margin

Gross profit margin tells you how much profit you’re making after direct costs (labour, materials, subcontractors). For construction firms, it’s the heartbeat of every project. Too many SMEs think monitoring overall turnover is enough, but a £1m project that only clears 5% gross margin is far riskier than a £300k job at 25%.

Small businesses often overlook margin tracking, assuming it’s “for the big players.” In reality, it can make or break even a modest-sized firm.

Consistently tracking gross margin helps directors spot underperforming jobs, negotiate better supplier terms, and set pricing that protects profitability. Even a 2% uplift in margin on a £5m turnover firm means an extra £100k profit.

Ignoring gross margins means relying on “busy equals profitable.” You could win work, keep staff busy, and still be losing money.

Strategy

• Break down gross margin by job, not just at company level.

• Use management accounts monthly to see which contracts deliver vs drain.

• Build gross margin targets into pricing, ensuring you cover overheads, prelims, and contingency.

Real Numbers

A groundwork contractor with £2m turnover improved margins from 12% to 18% by revisiting supplier terms and adjusting site labour allocation. The result? £120k extra profit in a single year.

2. Cash Conversion Cycle (CCC)

Cash flow, not profit, pays suppliers and wages. The CCC measures how long it takes to turn project spending into cash collected. In industries where payments are delayed by 60–90 days, this KPI is vital.

Smaller firms think it’s only relevant to large corporates with complex supply chains, but in construction, one late payment can cripple a growing SME.

Monitoring CCC highlights bottlenecks, late invoicing, retention payments, or slow-paying clients, so you can negotiate terms and protect liquidity.

Relying on paper profits while cash is tied up in work-in-progress can force you into costly overdrafts or emergency loans.

Strategy

• Track “days to invoice” and “days to collect” religiously.

• Negotiate stage payments aligned with project milestones.

• Use rolling 13-week cash flow forecasts to predict shortfalls.

Real Numbers

A lift engineering firm reduced its average payment cycle from 82 days to 56 by invoicing faster and pushing milestone payments upfront. The impact? £250k of extra liquidity without borrowing.

Misconceptions

“Cash flow looks after itself if you’re profitable.” Not true, many profitable companies collapse because cash is stuck in projects.

3. Overhead Ratio

Overheads, office staff, rent, insurance, vehicles, eat into margins. The overhead ratio compares overheads against turnover, showing how lean (or bloated) your cost base is. SMEs often ignore this, assuming growth alone will cover rising costs. But if overheads grow faster than turnover, margins vanish.

A controlled overhead ratio gives you flexibility. It means you can invest in new hires or equipment without stretching cash.

Letting overheads creep, for example, adding admin staff too quickly, can mean break-even shifts upwards, leaving you exposed when revenue dips.

Strategy

• Review overheads quarterly, not just at year-end.

• Benchmark overhead % against industry averages (typically 10–20% in construction SMEs).

• Link major costs (like vehicles) to project profitability, not vanity.

Real Numbers

One East Midlands contractor cut overheads from 24% to 18% by renegotiating leases, outsourcing finance functions, and reducing unused software. On £5m turnover, that equated to £300k saved.

Misconceptions

“Cutting overheads means cutting quality.” Not if done strategically. Efficiency often delivers better service at lower cost.

4. Work-in-Progress (WIP) Accuracy

WIP accounting ensures revenue and costs are recognised in the right period. Get it wrong, and your accounts show “profit” that doesn’t exist yet. Smaller businesses think WIP is only for major contractors,

but even SMEs with a handful of projects risk overstating profits if they ignore it.

Accurate WIP helps you understand real-time profitability, preventing nasty surprises when costs overrun.

Overstated profits can lead to overspending, tax overpayments, or poor dividend decisions.

Strategy

• Review WIP monthly with project managers.

• Compare % completion with actual costs incurred.

• Adjust management accounts for over/under billing.

Real Numbers

A £1.5m scaffolding company overstated profit by £90k due to missed WIP adjustments. After correction, the directors avoided paying tax on income that hadn’t been earned yet.

Misconceptions

“WIP is too complex for small businesses.” In reality, it’s essential for any project-based business.

5. Sales Pipeline & Conversion Rate

Sales figures don’t just tell you how much you’ve billed; they show whether the business has fuel for the future. For SMEs in construction and engineering, projects often run for months, meaning today’s sales pipeline determines tomorrow’s cash flow.

Many small firms only look at “jobs won” rather than tracking what’s in the pipeline. Without visibility, directors either overcommit resources or miss growth opportunities.

Tracking your pipeline and conversion rates shows how many leads you need to hit revenue targets. For example, if your average project is £100k and you convert 1 in 4 tenders, you know you need at least £400k of bids in progress for every £100k of sales forecasted.

If you only review sales after the month closes, you risk dry spells, idle staff, and knee-jerk decisions (like discounting heavily to fill gaps).

Strategy

• Break down pipeline into stages: enquiry → qualified lead → tender submitted → job won.

• Measure conversion rates at each stage, not just final wins.

• Align pipeline with resource planning — e.g., don’t tender for 10 jobs if you only have capacity for 4.

• Review pipeline weekly with both sales and finance teams.

Real Numbers

A £3m turnover electrical contractor improved their conversion rate from 18% to 24% by focusing bids on higher-value projects. That 6% uplift equated to an additional £180k of annual revenue, without increasing tendering workload.

Misconceptions

“Sales is separate from finance.” Not true, without linking pipeline to cash flow and resourcing, growth can collapse under its own weight.

Key Takeaways

• Margin, not turnover, drives long-term success.

• Cash flow is king, profits mean little without liquidity.

• Overheads must be controlled to protect resilience.

• WIP adjustments prevent false profits and nasty surprises.

Big business decisions should never be based on guesswork. At JFA, we help SMEs in construction and engineering use KPIs as decision-making tools, not just reporting metrics.

Wrapping up today's insights, tomorrow we simplify another accounting challenge.