Encouraging signs in 2016 ACE Benchmarking Report

This year’s ACE Benchmarking Report of industry performance and trends was launched this month and reveals some interesting findings, writes Brian Nolk.

With the main benchmarking project for larger UK and European companies now in its 11th year and the report on industry SMEs is in its sixth year, the data compiled by ACE’s data partner the Centre for Interfirm Comparison can confidently show us an overview of the industry.

Seen in the main benchmarking report, in 2016 the weighted growth rate for larger UK firms with over 250 employees, was 12% excluding the impact of acquisitions. For European firms the weighted average growth was 4.5%, with 90% of all larger firms across Europe and the UK reporting higher revenues.

The average debt collection period for UK companies was equivalent to 75.5 days’ sales in 2015/16, which was an increase of almost one day from the previous year’s average of 74.7 days. The European firms’ 2014 average was much higher than the UK average at 98.5 days’ sales, but there was a useful improvement to 92.1 days in 2015.

Looking at the numbers of employed for all firms (i.e. a weighted average), there was an increase in permanent staff numbers of 6.4% for all UK firms. Total contract staff numbers were 3.7% higher, giving a total increase in headcount of 6.1%. Just over 80% of UK firms increased their total headcount during the year. For the European firms, total headcount increased by 7.4% between the beginning and end of the year. Excluding staff joining through acquisition, headcount increased by 4.9%. Almost 85% of European firms increased their headcount during the year.

Firms were asked to provide forecasts of revenue and profit for the current year. Of the firms which completed that section, 61% forecasted a rise in profit margin. The median forecast was for an increase in profit margin of 0.3% points, which would indicate an average margin in 2016/17 of 8.2% for this year’s group of participants. Of those that provided a forecast, revenue is expected to grow by over 12%.

UK companies were, on average, forecasting revenue to grow by 13% and a 1%-point improvement in profit margin. The European companies that provided forecasts were predicting 12% growth in income but only a 0.1%-point increase in margin.

SME Benchmarking
In the 2016 SME Benchmarking project 90% of firms reported increased revenue. The median increase in revenue net of subcontract costs was +11.5%. Late payment remained a problem for some SME firms with 27% of respondents experiencing “problems getting payment within the contract terms” which was an increase from 24% in the previous year (although not as bad as the 29% reported two years ago).

The chart above shows the average breakdown of revenue into the principal cost headings and profit for SME Benchmarking firms, and the corresponding figures for the larger UK firms that took part in this year’s main ACE Benchmarking project.

Comparison of the results suggests that the typical SME firm had lower staff cost ratios than larger UK firms for both fee earners and support staff. Average overheads for the SMEs were 2.8% points higher than the larger UK firms but most of the lower staff costs fed straight through into higher profit margins than their larger counterparts.

Staffing up, order books improving
Each SME firm was asked to provide their headcount at the beginning and end of each financial year. Of the firms who reported data 63% took on extra staff in 2015/16, 21% were unchanged and none of the companies reduced their headcount. The simple average increase was 11.9%, the weighted average rise was 15.8%.

The average order book improved nicely for most of the industry with the median for SMEs increasing to the equivalent of 6.8 months’ work compared to 5.7 months last year, for the same group of firms. The average order book for larger UK firms also reported an increase from 11.9 to 14.1 months’ work.

Brian Nolk is the economist at the Association for Consultancy and Engineering.