Most owners are trying to achieve greater operational efficiency, but the only way they measure their company’s progress is by financial statement trends — sales, costs and expenses. By confining their tracking and analysis to financial statement data, they miss out on valuable metrics that could help their companies boost productivity and profits.
If every family business in the country could track just two or three metrics each month to achieve maximum return on investment and profits, more companies would be using metrics. Each company, however, has its own operational strengths and weaknesses with no one formula generically correct for all companies.
The following is a sampling of key efficiency metrics, segregated by sector. Feel free to pick and choose from this list. Experiment! Keep what works for you and discard the rest.
Retail Metrics:
Gross profit per labor hour – Divide total gross profit for the month by total labor hours. Combined with weighted cleanliness/appearance store ratings, this metric is a good indicator of labor efficiency. Many companies segregate this metric by store type for benchmarking purposes. For example, freeway locations will have significantly different labor efficiency averages than small in-town stores. Compute this metric for all your stores, and then see what patterns emerge.
Gross profit per square foot per customer – Divide daily gross profit by store square footage, then divide that total by the day’s customer count (determined by number of register rings).
This metric is an excellent indicator of merchandising effectiveness. Every time you change a store’s merchandising, keep a close watch on this ratio. Notice that this metric makes the playing field level in terms of store size and traffic count. It’s an excellent measure to apply across the board to all stores in your chain.
Inventory level to supplier frequency ratio – Days of inventory supply on hand (retail inventory divided by one day’s retail sales) divided by average vendor terms.
This is one of the very best measures of inventory efficiency that goes one step beyond simple inventory turn ratios. The ideal maximum result is 1.5 times. For example, if your supplier delivers once per week, to meet a target metric of 1.5, you would need to keep inventory at a maximum eleven days of supply.
Wholesale Metrics:
Percentage current accounts receivable – Divide dollar amount of receivables extended to customers who are within terms by total receivable dollars outstanding.
For most marketers, a big chunk of cash is tied up in receivables. Meridian worked with a company that improved receivables from about 70% current to over 90% current just by having the A/R clerk report this metric to the owner every Friday. Within 60 days, they freed over $600,000 in cash! This metric quickly focuses the receivables staff on monitoring and collections, with emphasis on the largest dollar accounts.
Driver gross profit per mile – Divide total gross profit earned in a day by miles driven on a per-driver basis.
Each driver can easily enter this wonderful efficiency metric into a personal computer at the end of his/her shift. The beauty of this metric is that it actively involves drivers in profitability. When coupled with a bonus structure, tracking this metric gets drivers motivated to more quickly deliver additional products priced at above-average margins. Don’t be surprised if this measurement gets driver staff putting a little pressure on sales to achieve those higher margins!
Gross profit per employee – Divide monthly gross profit by full time employee count.
This measure helps you manage staffing levels. It is easy to become under or overstaffed especially during times of growth. This metric forces you to review staffing levels as profits rise or decline.
Overhead per customer – Divide the total operating expense per month by the number of customers served in that same month. If you can’t get a customer count, use overhead per invoice.
By tracking this number at your different locations, you can easily detect when costs are escalating and determine the greatest efficiencies within those plants.
To thrive through this decade, owners must get operationally efficient. To get operationally efficient, they will need key non-financial statement metrics. These are just a sampling of potential measures. Don’t be afraid to create your own. For every area where you want to boost efficiency, find measures because what gets measured gets done. Often the mere act of tracking an efficiency metric results in improvement before you even have a plan for improvement. So, get measuring today and good luck!
Meridian Associates has been partnering with family-owned businesses for over 30 years to remove barriers, accelerate business growth, build their legacy, and reduce stress levels. With three, high-impact business events each year, The CEO Exchange, Women in Family Business, and The Family Business Intensive, we continually provide best practices & proven strategies that keep multigenerational businesses thriving. Discover how Meridian can help your business thrive through our combination of high impact business coaching, advisory, M&A, and precision company valuations by visiting www.askmeridian.com or calling us at 817-594-0546.
