AS NUMBERS WONKS, my colleagues and I are big believers in financial benchmarking using ratios. We like ratios because they allow you to focus on afinancial relationships in your business, rather than just on absolute numbers such as annual sales. Ratios let you measure performance in comparative terms. Using ratios, you can measure your company’s financial operating performance across different points of sales activity, against your industry peers’ performance, and against your own historical performance.
The end goal, of course, is to identify the causes of possible problems and design action plans to correct the conditions, thereby controlling the course of your company.
For the last three years, we’ve conducted our own benchmarking study of our performance group members. While we sort the data in several different ways, one of the key groups we look at is called the Top 25%.
This is the group that made the most in both owner’s salary and net profit before tax, as a percentage of sales. We call this combination owner’s discretionary profit, or ODP. Once we have this percentage, we rank all the participants by ODP from top to bottom, and label the top quartile the Top 25%. Our goal is to identify the management efficiencies of the Top 25% to evaluate how they became so profitable.
The answer? Efficiency, not volume, seems to be the critical criteria. Although companies with sales over $5 million represented 21 percent of all study participants, they represented only 10 percent of the Top 25%. Conversely, companies with sales under $1.8 made up 30 percent of the Top 25%.
The Top 25% was more efficient in several key areas.
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- Higher employee productivity — The number of employees for the Top 25% has remained essentially the same since 2004. These stores maximized profitability by growing their sales without adding staff.
- Higher sales per employee, lower staff costs — 9.9 percent of sales versus 14.6 percent of sales for all companies.
- Lower total expenses — Selling, occupancy and general and administrative expenses were significantly lower at 25.6 percent of sales versus 34 percent of sales. Not yet inspired to sharpen your pencil? Apply this difference to median (or halfway point) of sales of $3,048,219 for the group and the result is more than $256,000 in additional profit dollars for those who can control expenses as efficiently as the Top 25%.
- Lower cost of goods sold — This figure was lower by almost 1 percent, driven by a combination of better buying and less discounting.
The result of all these efficiencies shows up in a lower debt-to-worth ratio. Debt-to-worth measures how many dollars you owe versus how much you own and is a measure of risk.
For every dollar that the Top 25% owned, they owed 67 cents. Compare that to the rest of the companies, which had a debt-to-worth of $1.02.
Guess which group a banker would rather lend to? Not surprisingly, the Top 25% stores were also more liquid at $5.50 in current assets for every dollar of current liabilities, versus all companies at $3.
Don’t get us wrong, we love sales and growth. (We’re business owners too!) We just think you don’t have to give up profit to gain more sales and that you can find ways, using ratios and benchmarking, to grow both wisely and efficiently.
- Lucky Numbers
- Get a Perfect Figure
The Top 25% companies in the 2006 FIT benchmark study spend 8.4% less in total expenses than all participating companies. Where did the difference come from?
- 4 percent less in selling expenses, including sales staff salaries, commission and bonuses, for a total of 13.6 percent.
- 1.1 percent less in occupancy costs, for a total of 3.8 percent
- 3.3 percent less in general and administrative expenses, for a total of 8.2 percent
- Money Math
- What’s The Difference Paying Just 1% Less in Expenses?
Take the median (or halfway point) sales figure of our survey participants, and this seemingly small saving represents more than $30,000 in additional profits. What would it be for your company?
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This story is from the September 2007 edition of INSTORE.
