Seven key numbers to drive profit

WHILE financials in a manufacturing business are important, some numbers are critical to success. Most of the ‘Seven Key Numbers’ listed below are not contained in a typical set of financials because they are ‘Drivers’ rather than ‘Results’. Let me explain why these seven numbers are so critical.

WHILE financials in a manufacturing business are important, some numbers are critical to success.

Most of the ‘Seven Key Numbers’ listed below are not contained in a typical set of financials because they are ‘Drivers’ rather than ‘Results’. Let me explain why these seven numbers are so critical.

(1) Revenue Growth Percentage – Business owners focus attention on Revenue and this is critical.

As critical is what those sales cost to make and fund. When you sell something there are costs involved, e.g. goods for sale and production.

It’s critical to know these costs because if they exceed revenue you are making a loss.

If the other numbers aren’t being managed right, revenue growth will exacerbate cash-flow issues.

(2) Price Change Percentage – means the percentage increase or decrease at which you sell products or services.

In a highly competitive market-place it’s tempting to sell for the cheapest price.

That’s fine but if you’re not covering costs you will not be profitable. Many businesses fail to make regular small increases e.g. CPI.

This can cause margin squeeze and gross profit suffers, due to reduced revenue, compared to the costs of producing goods.

Customers can get a shock if there’s a large increase, whereas regular small increases are more acceptable.

(3) COGS Percentage — ‘Cost of Goods Sold’ (COGS) means the costs incurred to get the product ready for sale.

A small reduction in COGS Percentage can have as much impact on Profit as a large increase in Revenue.

A little attention to what makes up COGS,and some negotiation with suppliers for better prices, can pay huge dividends on Gross Profit. Analysis of project operation and identification of improved efficiencies can put thousands of dollars into the bank.

(4) Overheads Percentage – Many business owners focus attention on Overheads in the Profit and Loss Statement without comparing them relatively, (by percentage) to Revenue.

If you just look at Overheads dollar figure you could be making more Revenue without increasing Net Profit. This means you could be putting in a lot of effort for too little return.

(5) Days Receivable — is the number of days, on average, customers are taking to pay. Managing this number can have a huge impact on cash-flow.

For example, if Accounts Receivable Days is currently 70 and you can get it down to 50, you could be putting tens of thousands of dollars into the bank.

To improve this number focus on Accounts Receivable and Debt Collection. The report from your accounting system listing the customers and how much they owe is good.

If your business is growing rapidly though, you need to know how much, Accounts Receivable Days are changing compared to Revenue growth.

This is because if it’s not comparable you will experience cash-flow squeeze and could run out of working capital.

(6) Days Payable — is the number of days, on average, you are taking to pay suppliers.

This number is just as important as Accounts Receivable Days in that it can have a big impact on working capital.

Some small changes to procedures in Accounts Payables can pay big dividends in your bank account. If business is growing this could be critical cash for funding growth.

(7) Days Inventory — is the number of days, on average, that goods or materials are sitting in your store-room, from when they are delivered by suppliers, to when they are shipped out to customers or used in production.

These goods often have to be paid for before they have been sold or used. This means you’ve spent valuable working capital to have the stock sitting there waiting to be sold or used.

If you can manage this situation, and reduce the number of Inventory Days, this can have a big impact on your bank account and working capital.

It’s very tempting when a salesperson calls and offers you a discount to buy more stock. It’s useful to consider the amount of working capital that will be tied up in that stock, compared to the discount being offered.

If you are borrowing funds it’s also important to consider the amount of interest payable on those funds tied up in slow moving stock.

Work in Progress (WIP) Days is similar to Inventory Days, in that your ‘stock in trade’, is the labour and materials for sale.

Slow WIP days can be just as dangerous to cash-flow and working capital as Inventory Days. Anything you can do to tighten up processes and speed up invoicing, will pay dividends in your bank account and reduce interest.

For help with the Seven Key Numbers call CAD Partners on 1300 36 24 36 for a free Financial Health Check or visit www.cadpartners.biz. There is also a free e-book on cashflow control available to MM readers, www.cadpartners.biz/e-book.htm.