The end of the year is almost upon us. Only 9 full weeks left in 2015. The last quarter of the year always goes fast. There are simply more holidays and outside demands in the last three months of the year.
I wanted to take a break from big, high-level industry analysis for a moment and drill down into the nuts and bolts of financial management. As the year begins to draw to a close it is a good time to take stock of the current state of business. Here are six simple financial KPIs to look at every month to increase the value of your business.
Many of these financial KPIs are similar to metrics that the large consolidators use to evaluate individual locations across their networks. While there are many more complex metrics that are important to evaluate regularly, this is a list of what I consider to be simple financial KPIs that a business owner ought to be looking at on a monthly basis, if not more frequently.
Gross Profit
The first place I look when evaluating a business, even before looking at sales, is gross profit. Gross profit is one of the most important financial metrics of a business. Small changes in gross profit can have significant impacts on the overall value of your company.
A common mistake I often see is a business managing to sales rather than gross profit. The premise is that an increase in sales will take care of everything else. Often I see compensation plans that reward sales with little to no emphasis driving profitable sales. This is dangerous as it often provides the wrong incentives and does not align employees with ownership.
In the collision industry gross margin tends to be between 40% and 45%, depending on the sales mix and how paint rebates/prebates are booked. If a business reports margins significantly greater than 45% I become concerned about the long term ability of the business to sustain those margins and retain their customers. Less than 40% and I become concerned about the long term profitability of the company. In both cases I want to know what drives the margins, i.e. is it a pricing issue, a discounting issues, a cost of parts and labor issue, or a combination of all of the above.
