Taking a closer look at measuring profitability in a timely manner.
By Marty McGhie
Here’s a tough question for you: What tools do you have to measure the profitability of your businesses in a timely manner?
Your first answer is probably "profit and loss statements," typically the key metric used by shop owners for determining success. Most P&L and other financial statements, however, aren’t available for review until weeks after month’s end.
So timeliness is a problem. If we don’t find out whether or not we’ve been profitable in a given period-be it a week, a month, or a quarter-until several weeks after the fact, can we really react to that data and make corrections to our business?
At my company, months with very high sales will always generate good profits. But the problem with that is we tend to make the false assumption that when we generate good profits, we must have performed well in our production processes. In reality, unless we’re using daily metrics to measure the success of individual jobs in terms of labor, materials, waste, re-dos, and other factors, we really don’t know how well we’re doing. Who’s to say that in a month of earning a 5 percent return on your sales, you couldn’t have earned 7 or 8 percent with the proper in-course adjustments to problem areas that were no longer visible three or four weeks down the road?
Good vs. bad information
But before collecting all kinds of new data, consider another question: Once you have metrics in your hands that measure your business, what do you do with them? I’ve heard plenty of managers admit that, although they have various ratios and spreadsheets of information at their disposal analyzing different areas of their business, they often don’t understand them very well. Thus, they don’t rely upon those metrics when making important decisions. After all, it is possible to have too much information to deal with.
Remember, the information available to you-whether it be in the form of ratios, job cost reports, labor efficiency, inventory analysis, or financial statements-is only valuable if it helps you make decisions. So as you develop metrics to measure your business, be certain you’re focusing on the ones that will help you evaluate the key areas, whether they’re strategic, operational, or financial in nature.
It’s money that matters
There are some specific tools that may be useful for your business. One critical piece of information, for instance, is cash flow. A few years ago, our company initiated a report on cash that we now send to our senior management team on a daily basis, detailing the following items:
* Daily cash balance;
* Outstanding accounts-receivable balance, aged from current to over 90 days;
* Outstanding balance on lines of credit;
* Outstanding accounts-payable balance, also aged; and
* Significant cash commitments in the upcoming five to seven days, such as payroll, sales tax, and quarterly income-tax payments.
Providing your management team with constant visibility on cash measures is especially helpful when managing tough times. It encourages everyone to avoid unnecessary expenditures and save money wherever possible.
Plus, if your management team has up-to-date information on your cash positions, when you have "big picture" discussions that involve cash commitments, they’ll know where you’re coming from. For example, consider a discussion of salary and wage raises for the company when you’re coming off a tough quarter and cash is tight. If your team is already aware of the difficult cash position you’re in, you’re more likely to arrive at decisions with their understanding and support.
Another example of a valuable metric is job profitability. Very few shops have the ability to measure each job as it comes off the shop floor in terms of direct materials, labor, machine time, waste, etc., and that’s a problem in our industry. Without that kind of visibility, it’s very difficult to analyze the areas where we’re losing money versus those where we’re profitable. Timely, job-specific feedback allows you to make the smartest adjustments.
But when it comes to metrics, remember that we aren’t just looking to measure areas that may be failing; we’re also trying to identify the parts of your business that are working well, in order to perpetuate success. Be proactive in improving the metrics by which you measure your business, and you’ll find more success in your future.
Marty McGhie (email@example.com) is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.