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10|August 2022 slippery rock gAzette
Is That All This Data Is Good For?
Have you ever had a month when sales were strong and you worked harder than ever, yet your month-end Profit and Loss Statement (P&L) showed poor results? There can be lots of reasons for this.
To find the true causes, you need the right kind of finan- cial information. Unfortunately, GAAP accounting (Generally Accepted Accounting Practices) rarely gives you the information you need to make good manage- ment decisions. The other prob- lem is a traditional P&L gives you information that is accumulated over a full month – and is often received a week or two after that month is completed. So, you are left with using your memory of what happened weeks ago com- bined with vague financial infor- mation to figure out why a month that looked so good didn’t gener- ate a good P&L.
Fortunately, there is a better way.
The right metrics accurately reflect what really happens in the business on an order-to-order basis and on a day-to-day basis. Used properly, these metrics can tell you:
• If an order is priced correctly.
• If your template-fabricate-in stall processes are performing effectively.
• If your business profitability is headed in the right direc- tion during the month instead of after the month.
• Which market segments (retail, commercial, big box, customer contractor, etc.) are more profitable.
The Metrics
It’s obvious that, for your business to make money, you need to generate more cash than you burn. Managing this daily while using real time data is also much easier than trying to
Being able to quantify which market segments and which specific customers are financially better for your business is an essential piece of preparing
for an economic slowdown.
While you already have a good intuitive feel, the calculations in this
article can quantify your intuition.
Ed Young
Fabricator’s Business Coach
remember what happened weeks ago. With the right metrics, this is easy to do.
Operating Expense ($OE) is the measure of how much cash you burn. It’s best to average several months to establish a monthly number.Themonthlynumbercan be easily divided to generate daily andhourlyrates.Itisimportantto note that larger shops will have a higher $OE rate than smaller ones.
Throughput ($T) is how much cash each order generates. It is calculated for each order when the order is booked. That num- ber later gets finalized once the installation is completed – to reflect additional material used or changes in the job. You can learn more details on how to calcu- late both metrics from the article Stop Counting The Square Feet You Produce (you can find this in the Slippery RockGazette.net/ archives, April 2021 issue).
Timely Information
Knowing if you ‘won the day’ yesterday can be a game- changer for your business. How much profit did you schedule through your installs for yester- day? Did you fully complete all the installs scheduled for yester- day? Was that a profitable day or not?
Total the $T for each job that was scheduled for installation yesterday. Compare that total to the daily $OE rate. As you track this metric every day, you can know if your business is on track to generate a profit for the month.
Now look at tomorrow’s install schedule. How much profit have you planned to make tomorrow – what about next Tuesday? With a reasonable backlog of scheduled installs, you could even predict the resulting P&L for the month – before the month is over.
The Price Is Right?
Another way $T data is use- ful is for evaluating your pricing
structure. A good rule of thumb is $T as a percent of the job price should run around 70 per- cent for retail jobs – assuming all your installers are W2 employ- ees, and your sales commissions run 2-3 percent. If your installers are contractors and you also have a strong sales commission per- centage, $T as a percent of the job price could be as low as 60 per- cent. If it gets lower than that, you may need to look at the arti- cle How Much Work Can Your Shop Handle?(you can find this in the Slippery RockGazette.net/ archives, May 2022 issue ).
Recession, Anyone?
$T can also be used to help you navigate the challenges of a downturn in the economy. If you have read the article How Fast Does Your Business Generate Cash? (you can find this in the Slippery RockGazette.net archives, November 2021), you know that $T per install hour can tell you which market segments generate cash for you the fastest.
While you already have a good intuitive feel, these calcu- lations can quantify your intu- ition. Being able to put a number to ‘Contractor A is easier to work with than Contractor B’ is pow- erful! Knowing just how much a problematic contractor impacts your profit can help you make good pricing and policy decisions to reduce that negative impact.
You already know that retail is generally more profitable than production builder work. Can you put a number to it? If retail sales are starting to slow and you
have a chance to sign a produc- tion builder client, how will your profit look with that change? If the production builder runs his business well – site conditions are properly ready for templates and installs, install dates don’t con- stantly change, material selection is limited, etcetera – what’s the impact on your profit?
Being able to quantify which market segments and which spe- cific customers are financially better for your business is an essential piece of preparing for an economic slow-down. Do you want to focus your marketing and sales resources on retail or cus- tom homebuilders or production builders or commercial? With the above data and your knowledge of your local market, you can make data-driven decisions that will pay off for your company.
In slow economic times, busi- nesses frequently get pressured to reduce prices. We are already seeing that in this industry. Using
the above data will help you cal- culate in advance just how much you can reduce prices and still survive. This is powerful infor- mation to help your salespeople deal with customers. Even bet- ter: You intuitively know which market segments in your area are less sensitive to pricing. Combine that knowledge with this data and a strong marketing and sales approach, and you could make more money – even if your busi- ness shrinks.
Knowledge is power. Knowing what drives the profitability of your business and being able to quantify those factors is a power- ful strategy for thriving in the eco- nomic changes headed our way.
You deserve to have a busi- ness that makes you money, But also allows you time to enjoy it. Contact the author at Ed@ FabricatorsCoach.com, or call 864-328-6231.
Email me if you would like to attend a free coaching session covering this topic on August 19th. For immediate individualized attention, go to this link to arrange a free business assessment:
https://fabricatorscoach.com/get-your-assessment/
This fall, we will offer a 10-part workshop on Preparing for a Recession. Learn more at www.FabricatorsBusinessAcademy.com
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