Your success is the sum total of all the decisions you make! To make good decisions, you need good data. That’s a given, right? But what data should you be looking at?
Today, companies have an untold number of Key Performance Indicators (KPIs) to choose from. Our technology and data collection methods often give us too much information. The key question is what numbers or KPIs really help us make the best decisions about our businesses?
I recommend three metrics that will give you insight into your current operations and help you do profit forecasting. Put a priority on these three numbers, and you will be well on your way to better decision-making. The beauty of these three metrics is that they apply universally.
1. Pipeline Coverage Ratio
Your sales pipeline is a listing of all your sales prospects. Typically you include the projected sales amount and then estimate the probability of success for each account. And you continually update the information regularly.
Sales Pipeline Coverage Ratio (PCR) is a fraction. The total amount in your pipeline is the numerator, and the sales goal is the denominator. So a sales PCR measures everything in the sales pipeline against your sales goal. In practice, I recommend your pipeline coverage be over 2.5x. That should assure you make your target, as long as you have a focused sales effort and have done a good job qualifying your customers.
Example: Your sales goal for the year is $5 million. Your current pipeline is $10 million. Your sales PCR is 10/5 = 2.0.
2. Gross Profit Margin (expressed as a % or in dollars)
Have you heard this saying before? “Revenue is for show, profit is for dough.” Revenue is important in terms of cash turnover, but we need to primarily focus on gross profit to increase pretax profit.
Gross revenue is revenue less cost of goods sold. Contrary to many accountants, I recommend not including any labor costs in getting to gross profits. Yes, this is a different lens to look at your numbers. By keeping labor out of the equation, this definition of gross profits gets you to a number that is the true economic engine of your business. You pay your bills with gross profit — not with revenue.
Example: Your total annual revenue is $5million. Your cost of goods sold (not including labor) is $2million. Your annual Gross Profit is $3million or 60%.
3. Labor Efficiency Ratio
Nothing of value happens within your company without labor productivity. Labor productivity is your most essential ingredient to a profitable business.
Business analysts may have been measuring labor productivity all wrong as businesses create streamlined processes and technology-aided jobs. Most people measure their labor efficiency as sales per full-time equivalent (FTE). The problem is, both sales numbers and the number of FTEs can be hopelessly flawed. The key is gross profit per labor dollar. This measurement is your labor efficiency ratio (LER).
Correctly measuring your labor productivity as gross profit per labor dollar will help you walk the tightrope of the right labor at the right time at the right price so you can hit your profit target.
Example: Your annual Gross Profit is $3million. Your labor costs are $1.5million. Your LER is 3/1.5 = 2.00 (Note: Read Simple Numbers by Greg Crabtree for great insight into LER)
So, what do you do with LER? The greater your efficiency, the greater the pretax profits you achieve.
We have identified 3 primary means to increase your LER, they are:
- Increase the level of your Team Talent, that is: Intentionally improve your team profile to an increasing number of A-Players – top performers who live your core values and get things done well.
- Strengthen your Execution Disciplines of setting Priorities, using Key Performance Indicators (KPIs) to measure progress, and Communication Rhythms – a combination of energetic, productive meetings to get things done and stay highly aligned as a team.
- Review, strengthen and measure your Brand Promise, beginning with a very clear definition of your Core Customer – the customer most likely to purchase your product or services at your price on a consistent, ongoing basis.
Put a priority on these three numbers, and you will be well on your way to better decision-making. Contact me for help implementing these KPIs in your company.
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