Have you ever had a month when sales were strong, 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 financial information. Unfortunately, GAAP accounting (Generally Accepted Accounting Practices) rarely gives you the information you need to make good management decisions. The other problem 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 combined with vague financial information to figure out why a month that looked so good didn’t generate 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-install processes are performing effectively.
- If your business profitability is headed in the right direction during the month instead of after the month.
- Which market segments (retail, commercial, big box, customer contractor, etc.) are more profitable.
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 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. The monthly number can be easily divided to generate daily and hourly rates. It is important to 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 number 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 calculate both metrics from the article Stop Counting The Square Feet You Produce https://fabricatorscoach.com/stop-counting-the-square-feet-you-produce/.
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 yesterday? Did you fully complete all the installs scheduled for yesterday? 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 useful is for evaluating your pricing structure. A good rule of thumb is $T as a percent of the job price should run around 70% for retail jobs – assuming all your installers are W2 employees, and your sales commissions run 2-3%. If your installers are contractors and you also have a strong sales commission percentage, $T as a percent of the job price could be as low as 60%. If it gets lower than that, you may need to look at the article How Much Work Can Your Shop Handle? https://fabricatorscoach.com/how-much-work-can-your-shop-handle/.
$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? https://fabricatorscoach.com/how-fast-does-your-business-generate-cash/, 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 calculations can quantify your intuition. Being able to put a number to ‘Contractor A is easier to work with than Contractor B’ is powerful! 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 production 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 constantly change, material selection is limited, etc. – what’s the impact on your profit?
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 slow-down. Do you want to focus your marketing and sales resources on retail or custom 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, business frequently get pressured to reduce prices. We are already seeing that in this industry. Using the above data will help you calculate in advance just how much you can reduce prices and still survive. This is powerful information to help your salespeople deal with customers. Even better: 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 business shrinks.
Knowledge is power. Knowing what drives the profitability of your business and being able to quantify those factors is a powerful strategy for thriving in the economic changes headed our way.
You deserve to have a business that makes you money, but also allows you time to enjoy it. Contact the author at Ed@FabricatorsCoach.Com or call 864-328-6231.
This article was published in the August 2022 Issue of the Slippery Rock Gazette, find it at: https://www.slipperyrockgazette.net/index.cfm/pageId/4688/Is%20That%20All%20This%20Data%20Is%20Good%20For%3F/