Originally published: 05.01.09 by Ruth King
Tracking industry trends will help you make better business decisions.
Last month I discussed how short-term benchmarking shows whether your company can pay its bills, has too much inventory, has productive employees, or has collection problems. Short-term benchmarking gives you the month-to-month financial information you need to make quick business decisions.
Long-term benchmarking tells you how your company is doing over time. It takes out all seasonality so you can see the long-term trends. You can make good business decisions on long-term benchmarking; however, it takes time to note the impact of your business trends.
Here is a typical financial statement graph for an hvacr contractor:
The graph looks like a sine wave. You really can’t tell how the contractor is doing except to say that there are profitable months and unprofitable months. Comparing where you are now with last year doesn’t help. You have to remember whether you were busy or slow, whether you had more employees or less, and other details to make an accurate comparison.
You can see that from a long-term perspective, the company had a decline and turned it around so that it was, until recently, heading in a positive, upward
One good or bad month does not have a significant impact on the long-term benchmarking. However, you must start making the necessary changes as soon as you see the trends going in the wrong directions. You must take small increases or decreases in your company’s trailing data seriously. You won’t see a significant impact of the changes in one month although you will see results of your efforts in a few, short months.
Here’s what the trailing, long-term benchmarking data looks like for the same company:
CALCULATIN GTHE DATA POINTS:
To calculate the May 2009 revenue data point: Add the revenues from June 2008 through May 2009 and divide total by 12.
To calculate the May 2009 gross profit data point: Add the gross profit from June 2008 through May 2009 and divide total by 12.
These graphs look at revenue, gross profit, overhead, and net operating profit. You can also use the same calculation methodology to determine the trends for service agreements, number of service calls, number of replacement systems installed, or any other data that you want to track to ensure that your company’s activities are moving in the right direction.
What good is trailing data? It allowed me to predict the downturn in the new construction market at least six months to a year before everyone really started noticing it. Why? Because the revenue line started declining even though the companies were still “busy.” Here’s what one contractor’s data looked like:
As a result of paying attention to long-term data, we were able to focus these companies on service and replacement. Doing this early helped them survive this economy. You can see that the sales line, although lower, has leveled out. This is due to the greater emphasis and greater sales in service and replacement to offset the decline in new construction.
Long-term data give you the trends you need to make marketing decisions, and help you guide the growth and survival of your company for years to come.
Articles by Ruth King
Understand Your P&L Statement: Gross Margin
Understand Your P&L Statement: Cost of Goods Sold
However you decide to categorize expenses in your P&L, it's important to be consistent.
Understand Your P&L Statement: Sales vs. Revenue
Sales are critical to survival — when revenue is actually generated is even more critical.
The 20 Percent Profit Myth
For a realistic goal, include owners’ compensation in the net profit equation.
Rethink Your Bonus Strategy
Enact a profit sharing program, rather than a bonus entitlement.