Here’s how to learn whether your company is trending positive or negative in key performance areas.
In my last blog, I told you about a family-owned business I counseled. The firm appeared to be doing well, but had no way of knowing whether its performance was trending positively or negatively. My assignment was to give company officers a means of gaining that insight, through the use of key performance indicators.
The company mentioned is a Web-based business that takes orders through the Web into its system. I first needed to learn how many product lines the company offered. Once I learned that, I identified three different measurements that we would need to help us gauge the cost of producing the revenues that flowed from those lines.
First, we had to determine the direct costs, or in other words, the cost of goods sold. Second, we had to determine the employee cost, split out including payroll tax and temporary help. Finally, we had to determine all other overhead.
Using the revenue from the product lines, we knew the consolidated revenue for the company. From that number we could calculate the average unit selling price. Next, I determined average unit cost for each of those three areas: direct, employee and overhead cost, and came up with total unit cost per period.
When we arrayed all the indicators, we had a lineup of direct costs per unit, summarized for the year. Those costs were clearly coming down. We then looked at the employee cost per unit, and compared that to the average selling price per unit, and that relationship was trending positively. The same was true when we compared overhead per unit with average selling price. We could also determine from those numbers what the unit gross profit was for the company.
Simply put, once we had the unit measurements in each area, we could plot and compare them period to period. Those plot lines revealed trends, and just as quickly, we knew the trends were positive. That knowledge made possible a discussion with management as to why those trends were occurring.
Whether your company is generating reports, offering consulting services, or selling gallons of oil, key performance indicators can determine important trends.
There is a way to measure the company’s performance using two ingredients: the number of employees on staff, and your output.
If you would like assistance in determining and tracking key performance indicators, please contact me. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Misclassified expenses and un-segregated revenue streams result in poor financial reports that can halt a company’s progress in its tracks
It’s hard to make informed decisions about a company’s future based on poorly- structured financial reports. Yet many small to mid-sized companies rely on reports beset with serious problems. No wonder these firms aren’t growing.
One common problem with financial reports is that the reporting system is capturing a variety of product or service revenue streams in one account. Without those streams being segregated, the CEO doesn’t know what areas of the business are doing the best and worst jobs of generating critical revenues.
Another all-too-frequent issue is misclassification of expense categories into overhead, rather than cost of goods sold. As a result, companies get a read on gross profit and gross margin that is simply not accurate.
For example, if a company wants to launch a new marketing program, officers will attempt to determine how many additional sales the program will have to generate to justify its cost. If they don’t have an accurate read on gross margin, they will make a decision based on skewed sales numbers. That could result in the marketing program being over or under-funded.
These financial reporting issues are very prevalent, and are present in four out of every five companies I counsel. The problems exist for two reasons.
First, company officials don’t know how to distinguish between direct costs to produce sales and those line items that should go into the category called “overhead.” Second, despite their desire to place all transactions in the right categories, the companies do a poor job of coding, or classifying, transactions.
Unless the company addresses these reporting issues, the CEO will face the same problems month in and month out.
He or she must take a stance and rectify the reporting problems. If the CEO is smart, he’s going to say, “We have a direct cost of generating these sales dollars in overhead. They should be in cost of goods sold.”
The result of poor financial reporting is wasted time. The company wastes time pulling financial statements together, and again wastes time being forced to pull information out of the accounting system into a format that can be used. Precious hours and days that could be used to concentrate on building profitable sales growth go down the drain. In this case, wasted time truly is wasted money.
In the preceding paragraphs, I’ve discussed the surprising prevalence of poor financial reporting, and the negative outcomes that result. In my next blog, I will address steps chief executive officers can take to meet the problem head on.