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BlogUnleashing Profit Potential: A Data-Driven Approach to Business Success

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Unleashing Profit Potential: A Data-Driven Approach to Business Success

by David Solomon, Principal

As published in Business of Furniture, April 25, 2024.

Did you know the average dealer has an operating profit of 2%, while the average best practice dealer’s is 5.5%? That’s a potential profit improvement opportunity of 3.5%. If we were to translate that into dollars for a $30M business, it would equal over $1M!

Recognizing a real profit improvement opportunity for your business is exciting. As an owner, principal, or other leader, you might ask yourself, where is our profit improvement opportunity?

UNDERSTANDING WHERE THE OPPORTUNITY EXISTS

You cannot truly take the journey towards profit improvement without thoroughly understanding your business relative to your industry peers. It’s important to benchmark against other businesses like yours, with similar sales volume, installed margin, service sales percentage, and market population.

Benchmarking against companies of comparable size, scale, and operational practices unveils invaluable insights. It’s not merely about comparing numbers but understanding the underlying reasons behind the differences. This process enables businesses to identify specific areas for improvement and formulate more targeted strategies.

In this article, we will discuss the key metrics you should look at and the value of benchmarking to understand where your business is currently, and what its true growth potential is so you can make better-informed business decisions.

IDENTIFYING KEY NUMBERS FOR PROFIT IMPROVEMENT

Example of critical financial numbers for an average $30M dealer

Installed Margin

A top metric we recommend you asses is your Installed Margin, which is a measure of profit margin that includes Product Cost of Goods Sold (COGS) plus Warehouse, Delivery, and Installation (WD&I) expenses plus allocated COGS for Design/Technical Services and Project Management.

We cannot overstate the importance of this number because once you’ve identified the cost of doing business, your installed margin is what you have left to run your business and generate a profit. Let’s put this in terms of numbers. Let’s say that as a $30M business, you have a 20% installed margin. After the cost of goods sold, the $6M remaining is for you to run the business and make a profit.

Items for you to look at to improve Installed Margin:

  • Dealer-billed product margins for your aligned and non-aligned manufacturers
  • Buying better: negotiate better pricing
  • Service Sales as a percentage of total revenue for Design, Project Management, and labor-based services (WD&I)
  • Labor-based service WD&I margin

Core Operating Expenses

Another number to look at is Core Expense, which includes those activities classified as sales expenses (including Selling Expense, Design Expense less the cost of goods for related sales, and Project Management Expense less the cost of goods for related sales), plus General and Administrative (G&A) Expenses (which includes operating expenses such as Occupancy Expense, Office Expense, and Administrative Expense). This is another pivotal indicator of profitability. We know through benchmarking research that dealers who manage their Core Expense will tend to be more profitable.

Items for you to look at to reduce Core Expenses:

  • Sales Expenses, which include Selling Expenses, Design, and PM Residual (the cost of goods for related sales)
  • Selling Expense Compensation for Sales Management, Sales Staff, Sales Support, and other sales expenses
  • G&A Expenses, which include Occupancy, Office, and Admin expenses
  • Admin Expenses: avoid including profit distribution in owner’s income or bonuses
  • Productivity: Sales Staff, Design, Sales Support, PM and Admin Staff (Finance and HR)

Operating Profit

Operating Profit, which measures profitability from an operational point of view, is also a good number to focus on. It is measured before Other Income and Other Expenses (measures of the dealership’s ability to finance itself). Operating Profit differs from Net Income, which provides a broader financial picture but may obscure operational performance.

Items for you to look at to improve Operating Profit:

  • Increasing Installed Margin
  • Reducing Core Expense

Productivity

You will also need to look at productivity. There are two important numbers to pay attention to in this area.

 First let’s review Revenue per SG&A Staff, not including WD&I Staff – a productivity measure that looks at revenue per employee.

 Our sample dealer has a Total Revenue per SG&A staff of $898K per employee. For best practice dealers, it’s $1.1M. That’s a little over $100K of difference in revenue per employee!

Items for you to look at to improve Revenue per SG&A Staff :

  • Increasing revenue
  • Staffing levels: are you adequately sized for your volume?
  • Business processes that impact productivity: Sales Staff, Design, Sales Support, PM, Admin Staff (Finance and HR)

Now let’s review the second number Installed Margin per SG&A Staff, not including WD&I Staff – a productivity measure that looks at installed margin per employee.

Items for you to look to improve Installed Margin per SG&A Staff:

  • Educating and focusing the entire staff on increasing the Installed Margin
  • Price and sell strategically to increase product margins
  • Purchase from vendors better
  • Sell more services at higher margins

These two productivity numbers are the ones to focus on to identify red flags. Suppose you find that your numbers are lower than best practice. In that case, it’s an indication that you have the capacity in your business to grow without adding people. Or, you have to ask yourself if there is anything inherent to the way you run the business requiring you to employ more people to get the same job done as a best practice dealer.

THE POWER OF BUDGETING

One more important note: these numbers are also significant for budgeting. Once you establish a target revenue, a target installed margin, and a target operating profit, what is left over is what you can afford to spend on your Core Expenses. That said, you must be realistic about how much you can change in a year. It may take a couple of years to reach your goal.

USING THE NUMBERS TO DRIVE YOUR BUSINESS AND EXPOSE OPPORTUNITIES

Business is complex, but when it comes to improving your business, you don’t need to overcomplicate it. Leveraging the right data to maximize profit improvement requires a comprehensive understanding of key metrics and their implications for business performance. By analyzing the correct data, benchmarking against industry peers, and budgeting for your desired profitability, you can unlock hidden profit improvement opportunities that pave the way for sustainable growth.

Solomon Coyle can help you get started if you are not currently benchmarking. Maybe you’re benchmarking already, but this article has sparked deeper questions. Reach out to us — we’d love to talk with you.

Email support@solomoncoyle.com or call us at 703.547.9100.