The country is experiencing economic uncertainty. Whether you believe a recession is imminent or overblown media hype, the potential only makes the importance of tightening up operations more important. It’s never a bad time to reassess and implement improvements. Optimizing operations now will put you in the best shape to get through whatever winds up happening on the recession front.
Top performing businesses assess their strengths and weaknesses regularly. One way to do this is by assessing where they hold operational advantages or disadvantages against their competitors. Research and actionable information increase the odds of outperforming the competition. Take a look at the following financial benchmarks implemented for vcfo clients, and consider how you can achieve similar results in your organization.
A client CEO was looking for more cash for operations. After benchmarking against top performing competitors, it became clear that their average days of sales outstanding (DSO) at 53 days was 20 days higher than their nearest competitors. This company was tying up $197,000 per day in accounts receivable which could otherwise have been converted to cash. DSO improvement represented a $3.94 million opportunity for this company to meet its working capital requirements. Before looking at this DSO metric of their competitors, they thought their process was acceptable. It pays to do the comparative research and then ask yourself the hard questions about how you could improve.
The Sustainable Growth Rate (SGR), provides a quick measurement of how quickly sales can grow before cash becomes a limiting factor. Stated another way, SGR is the rate of change in sales that a business can self-fund. A client CEO looked at this measurement and determined he was maxed out for organic growth and required another round of financing to grow top line revenues. He also determined through this process that the top performers in his space were able to sustain a sales growth rate of 30% per year given their current profitability and financing mixes. That information represented opportunities for improvement to support the achievement of the sales goals the CEO targeted for his company. By examining what best performers in his industry were able to achieve, he set realistic goals for what his company could self-fund, and this in turn defined and supported his funding requirements.
A CEO providing residential and commercial HVAC services found they were spending approximately 2.25% of annual sales on repairs and maintenance of their fleet. Top competitors in the same industry spend less than ¼ of one percent on similar maintenance expenses. A deeper dive into the details resulted in a plan to change policies and procedures to bring their repair costs closer into line with top competitors. Although they remained higher than the industry average, they determined they were getting more life out of their fleet and that it was more cost effective overall to maintain the fleet longer than it would be to accelerate the purchase of new vehicles to support driving the lowest maintenance cost. Similar opportunities to compare against best performers and challenge your current plans exist in every expense category.
Attracting and retaining talent by maintaining competitive wages and benefits is one of the top issues business owners face. To see how you’re doing, count your full-time equivalent team members (FTEs) and divide your total compensation expense by this headcount. Then compare that result to the stats of your top performing competitors to see if you are competitive with your compensation. Compensation per headcount at the company level is a broad indicator. You may want to follow that up with a detailed compensation study for your key positions, particularly in this time of inflation and what has been dubbed “The Great Resignation.” For more help in this area, check out our blog on compensation strategy.
While not a monetary metric, do not overlook culture in the quest to be a destination employer. Culture is more important than ever. For more help in this area, see our recent blog How Company Culture Supports (or Sinks) Strategy.
Take the FTE number you calculated above and divide it into your annual sales. Then compare this result to that of your top performing competitors. If you have a big variance, this is an area to dive deeper into and try to figure out where you are more or less efficient and why. In our experience, overhead salaries are the first place to look, but that is rarely the full story – sometimes not a part of a differential at all. In recent years, automation is a key place to focus when researching competitive differences in this metric. Are you automating at the same pace as the best performers in your space?
In summary, there is usually significant profitability and cash that can be pulled out of your existing organization if you are willing to take a hard look and make the necessary changes.
Why not optimize what you have while you continue to build more revenue growth?
Connect with a vcfo consultant today to learn more about how your operating metrics compare to the best performers in your class. We will help you use that information to enhance operations and put yourself in the most competitive position possible.