As a follow-up to yesterday’s post, I wanted to expand on the area of having effective measurements and the ability to quantify what is happening with the organization. There’s no discounting the value of all the standard financial ratios, working capital measurements, and HR-related figures that tie back to revenues & other financial figures. However, these measurements are standard through any organization, are easily studied in any business school textbook, and really don’t provide the necessary insight to increase operational productivity. These are merely barometers to give you an additional confirmation that your efforts are paying off and your key measurement tools are providing the appropriate data for decision-making.

 

            Well that’s a great point of view, but what are the key measurement tools and what about a practical example that can bring that full-circle?  Let’s take the example of an apparel company that is selling to smaller retail customers. For years, that small company continues to grow, is building a great brand, and the strong growth is unknowingly masking the growing inefficiencies of the company. In further support of the company’s growth it acquires one or two very high profile customers that have hundreds of stores.  As growth starts too slow, or perhaps stalls, what are the measurements that you have in place to identify what your areas of weakness are and give you the necessary insights to focus your efforts and get back on a path of growth?

 

·         What is your revenue distribution among your customer base? Do you have too strong a concentration with any one customer?

·         Are you driving your revenue growth with lower quality sales that do not carry the margins upon which you built the business?

·         With the growth that you have been able to drive through a few new customers, do you have reporting in place that indicates the health of your core account base? What are the average revenues per door for your core accounts? Stable or increasing?

·         Are you having to commit an unusually high amount of resources to support newer significant customers and is this factored into your net customer margin calculations?

·         As a wholesale supplier, do you have effective reporting on your sales personnel and their productivity? What are their metrics versus last year, on a per-door basis, etc?

·         Are you tracking discount and markdown activity by customer? With these two factors in mind, do you have the ability to report net contribution margin by customer?

 

            There’s clearly a distinct difference between the standard financial ratios and those that you need to drive strategic decision making. If you’re coming to an organization where these measurements are absent then you quickly need to get up to speed with the company to develop a set of indicators that will support the rest of the team in their decision making. Changes in a consolidated gross margin figure or revenue per employee are not going to drive strategic initiatives.

 

            With the above considerations in mind, tell me how your indicators that track revenue by employee, working capital days, consolidated gross margins, operating expenses as a % of revenue, and all the other textbook indicators are going to really help you drive aggressive increases in corporate productivity. The only way you’re going to get there is to have a full understanding of your business, be willing to roll up the sleeves, and come to the table as a financial strategist for the rest of the team. You need to be aggressive in your approach to reporting and find the hidden information gems within your business that you can polish and exploit.

 

Thanks for reading . . . .

 

Jeffrey Ishmael