Posts Tagged ‘profit’

Calculate Revenue Per Employee To Increase Productivity And Cash Flow

July 22, 2010

by Doug Smith, President, The Woodhaven Group

If your company is increasing productivity then chances are the cash flow  of your business is also improving.

That is a good thing.

But how do you know if the productivity of your business is showing improvement?

Is there a quick easy way for an owner or CEO to know if the efforts to improve productivity compared to other businesses is working?

Yes there is.  One quick metric that will give the owner a snapshot is Revenue per Employee.  It is simply total revenue or sales divided by the number of employees.  If your company can increase sales while staying at the same employee level then it tells you that  the combined efforts of all employees is having a positive impact on sales growth and probably on cash flow.

Industries differ in the Revenue per Employee calculation that is reported.  Software companies and oil companies can have a high Revenue per Employee while retailers may show a smaller Revenue per Employee.  J. Bryan Scott showed an interesting table right here of 100 companies and their Revenue per Employee totals.

For the owner, it is critical that you define what an employee is.  I have always liked to use full-time equivalents (FTE).  For example, 2 part-time 20 hour employees equal 1 full-time 40 hour employee.  I would define how many hours is a FTE and divide that into total hours  worked.  That is my number of employees.  I take the sales total and divide by the number of employees to get my Revenue per Employee.  Retailers are often a good example of why FTE needs to be used.  Some retailers choose to employ primarily part-time employees while others choose to employ primarily full-time.  Wal Mart probably has a low Revenue per Employee number if they don’t calculate using FTE.

The other caveat is to recognize when comparing to other companies that they may have a high percentage of their work done by outside contractors who are not employees.  As a result, the company will appear very productive because there would be a high Revenue per Employee reported.  I would imagine Microsoft and oil companies like BP or Shell that use a lot of outside contractors will have high Revenue per Employee calculations.  

When it is all said and done, the truest measurement of productivity using Revenue per Employee is to track the trend in your own company.  Is Revenue per Employee going up or down?  Take the best year of sales and profitability in the history of your company and use that year’s Revenue per Employee calculation as a baseline to compare to.  If I had a bad 2nd quarter, I would want to compare the Revenue per Employee back against that baseline year.  Then I would take action to get to my baseline for the next quarter.

If you have an industry association where everyone computes Revenue per Employee the same way, then that becomes a great way to measure how productive your company is.

As an annual goal for my company, I would always challenge my management team with an aggressive improvement in Revenue per Employee.  I know that if I hit the goal then I probably had a great year from a sales, profit and cash flow standpoint.

I would be interested to know if your company has had success using Revenue per Employee as a productivity calculation.

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Save Time And Cash With A Few Good Performance Measurements

May 27, 2010

by Doug Smith, President, The Woodhaven Group

Next to more sales and more cash most owners and managers would list a desire for more time in their day.

How does an owner keep track of what is happening in the company when he or she is consumed with meetings, addressing emergencies and fulfilling commitments outside the office?

It is a challenge to say the least!

I have found there are a few measures of performance I can access daily and weekly that quickly tells me if things are going as planned.  These measures almost act as early warning signals that a small problem may be about to become an all encompassing issue the whole management team will have to address.  I refer to them as “How are we doing” metrics.

Every manager and every company is different.  I encourage you to identify a few key metrics that will work for you and your business.  My suggestion, however, is to not overdue the number of measurements you are tracking.  If you are having to dedicate staff to just preparing a few indicators for your review then you are probably looking at too many.

The measurements should be easily accessible and help you improve the company.  If they cannot aid in increasing sales or cash flow then maybe you can review that data later.

Over the last 20 years there has been a mini industry created in performance measurements.  Many PhDs and consultants have made a career in marketing  “Balanced Scorecards”, “Strategy Maps” and other indicators of productivity.  I find most of them interesting but often too costly to prepare and sometimes ignored by management teams.  If you use these and they work for your company then by all means you should continue.

The measurements I use appear to be obvious ones but that is OK.  They have worked for me.  Maybe they might work for you:

Cash Report:  This is a daily report that  shows the bank balance, deposits made, payments transmitted and ending balance or float.  I never want to be surprised on cash, whether it’s coming or going.

Daily Sales:  I know my sales plan and this tells me if we are tracking to hit it.  If it is a company that issues leads daily I will want to know conversion rate.  If there are multiple locations, product lines, or divisions I will want to know if all of them are tracking to hit their monthly sales goals.

Accounts Receivable Aging:  I want to see this weekly and determine who owes us money and if the  amount is increasing.  In my opinion, we deserve to be paid for the quality work we did and I am very aggressive in wanting to be paid on time.  I will also do a mental calculation of days of sales outstanding.

Accounts Payable Report:  I want to see this weekly and compare the balance owed against cash on hand, jobs moving through the system and new sales being generated.  In the event I get a call from the CEO of my top supplier, I always want to know what we owe and if we are current.

Marketing Percent to Net Sales:  This is normally a monthly report that tells me if we are overspending to create sales.  Many companies have gone out of business from spending too much in this area.  If sales are trailing the plan dramatically during the month I may cut back some area of marketing before the month is over.

These are the key performance measurements I stay on top of.  There are many other reports that I will review from time to time such as Revenue per Employee, Revenue per Visitor on a website and, of course, monthly financials.  But these 5 performance measures are important to me.  You may have different ones that work for your business.

Regardless what metric you use there are 3 important elements to keep in mind with each report:

  1. Establish a beginning baseline from which to measure results.  All measurements need a starting point.
  2. Always look at  trend over time of any performance measurement.  Are the current results just a blip or is there a pattern occurring?  Some management teams like to illustrate trends with a graph for impact.
  3. Take action.  Unless the results were a blip then, at a minimum, you need to ask more questions or look at additional data.  Is there a problem with pricing, a promotion, or a key account?  Are there quality issues preventing collection of money due?  Information is only good if you do something with it.

A few good performance measurements can save time, increase your personal productivity and improve cash flow and profit.

Make sure they exist in your company and are used.

Use The Lifetime Value Of A Customer To Increase Cash Flow And Profit

May 19, 2010

by Doug Smith, President, The Woodhaven Group  

To grow your business you need to retain your most profitable customers.  By keeping a customer who is profitable for the company it adds stability to the organization while increasing all important cash flow.

Lose customers and your business will find itself spending expensive upfront marketing dollars always acquiring new customers to replace ones that went to the competition.  Marketshare does not increase, profit becomes stagnant at best and cash flow suffers.  Consider it lost opportunity.

Some owners and CEOs say that they are satisfied to always be prospecting for the next new customer.  Losing customers, in their opinion, is just a cost of doing business.

These owners would not think this way if they took the time to calculate the lifetime value of a customer.  What is a customer worth?  Knowing this number gives the owner information that helps in developing and executing sales, marketing and operational strategies.  This knowledge becomes a competitive weapon allowing your company to utilize unique promotions or incentives since it becomes easier to identify your true return on investment per customer.

The lifetime value of a customer is really the profit generated from the sales of a customer over the liftime of buying from your company.  It is best to calculate using  group averages broken down by product category.  This allows you to then decide where to spend the most dollars to retain a specific group of existing customers.  Also, based upon the lifetime value of certain groups it shows marketing and sales where to invest the most dollars to acquire new customers.

The best example of explaining  the lifetime value of a customer calculation was in a Harvard study years ago. Read the Harvard customer study here.

As a CEO of a department store I not only knew the lifetime value of the lady shopping but also the lifetime value of her husband and 3 children as a family group.  I knew that if I satisfied the 3 children growing up shopping in the store I would have their 3 families as lifetime customers when each of them got married and had kids.  You can imagine how I calculated the lifetime value of a multigenerational family.  In some cases I had 3 generations of the same family as loyal customers.  It made an easy decision to happily accept that returned gift after Christmas.

The takeaway:  Know the lifetime value of your customer and never take that customer for granted. Now when you lose an upset customer because of poor customer service you know exactly how many dollars just walked out the door.

Is Your Core Product Still Generating Profit and Cash Flow?

May 10, 2010

by Doug Smith, President, The Woodhaven Group

Is your core product still a priority in your company?

Do your employees know what your core product is?

Is your core product profitable and creating cash to drive your business forward?

A core product of a specific business historically has solved a problem or fulfilled a unique need better than the competition.  Often it represents a product or service that is first to the market and is hard to displace.

As sales of a core product grows for a company a major benefit is a strong loyal customer base.  Examples of companies and their core products:

  • Starbucks:  a good cup of coffee
  • Google:  search and advertising
  • KFC:  chicken
  • Goodyear:  tires 

A few thoughts on core products:

  1. The core product of your business should be your company’s most profitable product line.  Calculate the direct profit of all of your products by taking the selling price less direct costs such as labor and materials.  You must know how profitable each product line is.  Based on profit, is your core product still #1.  If not, why not?
  2. Has your company become bored with your core product and branched into other product lines that are not as profitable but are using up cash and management time and talent?
  3. Does your customer know that you have been known for your core product and why?
  4. Have you evolved your core product to stay abreast of your customer’s needs or have you allowed competition to steal sales with a newer better version?

As a company grows sometimes it loses focus and direction.  Make sure your core product is the most profitable part of your business.

Never let a competitor take your core product and the loyal customers that go with it.

Am I Making Money? What Happened To My Cash?

April 30, 2010

by Doug Smith, President, The Woodhaven Group

Those are the 2 most basic questions every business owner, CEO, or senior manager should be asking.

Things move fast in today’s business world.  The economy, government, competitors and consumer groups are constantly challenging our way of doing business.

We have a plan in place and doing our best to grow our company everyday.  Is it working the way we want?  There are daily KPIs and dashboards in place to help us.  To me there is only one true analytical measurement and that is the monthly financial statement. Yes, I said monthly.  This is a place not to skimp on spending.  Quarterly or year-end reports are way too late.  Also, I suggest using a CPA.  If you cannot afford one full-time then use a reputable one on a part-time basis.

Monthly financial statements should be 2 things:

  • Accurate:  you do not have the management time to go back and correct bad numbers.  Besides, credibility is damaged when outsiders (think lenders) see you revising  results.  It’s a red flag that there may be bigger problems.
  • Timely:  you want to take actions to correct problems.  Getting a late financial statement means you lost another 30 days to improve.  I want to see financials no later than the 10th of the following month.

Still not convinced you need monthly financials?  Here are 11 important reasons you do need them:

  1. Are you getting the results you planned to get?  If so, then good. If not, then you want to know why, where and by how much you are missing your budget.  Was your original budget even accurate?
  2. It helps hold a manager accountable.  The management team deserves to know what areas are performing and not performing. Each of the managers needs to know how they personally are doing.
  3. There is always an area of the company that needs fixed.  This will help to clearly identify what it is and if progress is being made.  If there are multiple problems then the numbers will help you prioritize what to attack.
  4. If you have borrowed money then your lenders will expect financials.  If there are Board of Directors or advisors they will want to see the direction of the company.  Remember, there may be outside audiences wanting to see your financial results.
  5. The obvious will hit you between the eyes—– good or bad.
  6. Is there a 2-3 month trend occurring?  It could be in overall sales, profit or gross margin.  You also may find a clear trend in an important line item that is costing you profit and cash.  An example might be sales dropping while marketing and accounts receivable are increasing. 
  7. Is a branch location or product line not performing?  Without the ability to measure results you may waste valuable cash and management time  trying to grow the wrong part of your business.
  8. If you operate a seasonal business you need to know your off-season financial performance as well as whether the company executed as planned during your best months.  Example:  retail at Christmas, landscaping during the spring/summer.
  9. It can help your tax accountant by showing him/her whether you are making a profit during the year and at year-end.
  10. It helps you manage and plan cash flow needs based upon what is actually happening.  Do your cash flow budgets need to change going forward.
  11. If you are in an industry that blindly shares financial information, it lets you compare how you are doing against the top performers. 

Daily and weekly KPIs are critical to the success of a business but the monthly financial statement is the final scorecard that tells you if the sum of all your actions gave you the results you wanted.  You may discover the KPIs were wrong.

You must know what is happening with your cash and if  the business is profitable.

A timely and accurate financial statement will do that for you.

Take Aggresive Retail Clearance Markdowns To Increase Cash Flow

April 20, 2010

by Doug Smith, President, The Woodhaven Group

Retailers every year take big risks and invest huge sums of cash in inventories in the hopes they have identified this season’s “hot” style wanted by consumers.  These “hot” styles may be in fashion apparel, home furnishings, accessories, electronics, or even shoes.

Regardless of product, all types of merchandise share a few common traits.  The inventory setting on the floor is usually paid for and at that point it is only worth what someone will pay the retailer for it.  The goal is to have fast inventory turnover and put the cash back to work with a flow of new fresh exciting styles for the next season.  The buyers who can correctly identify these trends are worth their weight in gold.  However, in spite of how good the buyers are, a fact of life is that most merchandise is marked down and not sold at full price.

If an item does not move at full price the goal is to find the “right” price point and convert the merchandise into cash.  The faster a retailer can do this the better will be their cash flow and overall return on investment.

There are 3 types of markdowns:

  1. Preseason promotions to beat competitors and, in some cases, to identify what the hot items will be.
  2. Promotional markdowns taken in season to support traditional store wide events or annual events like Christmas Sales.
  3. Clearance markdowns to liquidate remaining inventory  

This last type of markdown, the clearance markdown, is where many retailers hurt their cash flow the most.

The reasons for clearance markdowns can range from simply buying the wrong styles to buying too much of a good item to buying a hot trend as it is ending.

There are strategies that can minimize the cash flow and profit impact of clearance markdowns:

  1. Don’t fall in love with the item.  If you personally made the selection it is hard to admit you made a mistake and you possibly might be the only one who likes it.  Take the markdown and forget about your pride.
  2. Don’t wait until some pre-ordained period to take the markdown.  If you bought 10 of an item and not one sold after a reasonable period you need to get it marked down.  The customer has spoken.  The item will not get better.
  3. The first markdown is critical.  Get the item to a price that will likely move it out the door.  Some retailers have a fixed markdown pricing chart they follow.  I don’t agree with that.  Some items need to be priced deeper than what is on some chart.
  4. It is likely you have identified “magic” price points that move clearance items.  Group various original price point items into these clearance price points and you will see inventory sell quicker.
  5. Many retailers refuse to markdown an item below what they paid for it.  Forget that strategy.  Even if the amount you receive is small you will be able to take those dollars and immediately invest it in fresh new merchandise that may sell at full price. You can then reinvest these new dollars in even more merchandise that could again sell at full price.   However, none of this can happen if you stubbornly hold onto an item because you refuse to lower the price below cost.
  6. Remember this.  Even an item marked down that sells adds to your total sales column. Until that happens it is just inventory….. that is probably overstated in value on your financial statement.
  7. Finally, a clearance markdown sale is a chance to reward your loyal customers who pay full price with an opportunity to get a bargain from your mistakes.  It helps you and its a good deal for your customer.  It’s another reason to keep them coming back into your store.    

Don’t forget that buying mistakes will happen.  The only sin is not acting quickly enough to convert those mistakes back into cash to continue to grow your business.