You’ve made it through the recession and you are still here. Are you feeling good? Lucky? Almost 4,000 flooring retailers have shut their doors during this recession. This may be as high as 20% or as low as 16% of the entire total of retailers who have bit the dust. It doesn’t matter. There still has been a bloodbath.
So, are you here because you are lucky? Or because you are good at running a business? And how would you know for sure? I think your luck or your competence may be tied to how well you have managed your CPV (Critical Profit Variables). The owners of the businesses in the graveyard (whether they knew what CPV were or not) poorly managed their CPV.
CPVs are the key measures that influence the return on asset (ROA) performance of your business. They are the set of factors that truly drives the financial performance of a business. ROA is simply pre-tax profit expressed as a percentage of total assets. ROA is the key financial measure because it best reflects the economic viability of the firm.
What should your ROA be? Most analysts argue that a pre-tax ROA of a least 5% is needed to sustain the firm. An ROA of 10% is considered good and 20% is considered excellent. It is also the measure of your success in managing your CPVs.
So, what are CPVs? What are the key factors that drive Return on Assets (ROA)?
Well, you would know what CPVs were if you (one of the 447 flooring firms) participated in the World Floor Covering Association 2010 Profit Report prepared by the Profit Planning Group. The 2010 report is an analysis of the flooring industry for fiscal year 2009. Not only would you have learned about CPVs, you would have also been given a personalized analysis of how you managed your business compared to other participating firms. For free.
The CPVs are: Sales per Employee - measures employee productivity; Gross Margin Percentage - reflects the ability to manage cost of goods sold effectively; Operating Expense Percentage – reflects the ability of expense control; Inventory Turnover (times) - reflects how well inventory is managed and Average Collection Period (days) - reflects accounts receivable collection practices.
Joe Montemagni of Baystate Rug Distributors Inc., 671 Grattan St., in Chicopee Mass., knows his CPVs. He has participated in the WFCA Profit Report for at least four or five years as well as the benchmarking Mohawk completed with their aligned dealers.
“At first I was overwhelmed with the report. It was complex,” said Joe. “There were so many different numbers to compare. There were things in the report that I never thought of measuring. I never thought about inventory management. Let’s face it, those who got business degrees probably didn’t end up in the flooring business.”
He continued, “We owners think we know and do everything right. However, none of us does anything alike. The information provided in the reports helped me compare my numbers to my peers. I was and am able see both the highs and the lows. The information helps me get motivated to do something specific instead of just going through the motions. It helps me sets more goals. Those goals keep me incredibly focused on the changes I want to make in my business.”
“Anyone can do this,” Joe added. “Be like me, start with small steps. I just tried making small changes, ones that I knew we could improve. There are classes that can help. I have participated every year since.” Here are a couple of CPVs Joe and his team has been able to improve:
Gross Margin Percentage: Benchmarking gave him confidence to raise his gross margin. To his surprise, sales did not drop. “Nothing bad happened,” he said. So he raised them again. Joe explained, “I wasn’t really charging enough. There is no reason I couldn’t raise them even higher. I don’t want to be the cheapest. If I were, I probably wouldn’t have made it through the recession. I was leaving money on the table.”
In addition, benchmarking encouraged him to talk to other retailers. Weekly, he holds phone conferences with five or six other retailers to discuss business, issues and actions that can improve key CPVs. As an example, one retailer was selling an upgraded cushion for $0.75 a sq. ft. Joe is selling it for $1.15 a sq. ft. His fellow retailer was leaving profit on the table.
Sales per Employee: The benchmarking reports encouraged Joe to study the productivity of his salespeople. He compared what he was paying versus what they were producing. He decided to change his compensation system, rewarding sales and higher margin. That system verified the adage, “You get what you reward.”
In addition, he measured the key productivity stats for a salesperson: Sales, average ticket, closing rate and margin. By paying attention to their productivity, he verified the second adage, “When performance is measured, performance improves.” Now his salespeople want to know how they compare to other salespeople. They are motivated to get better. “Last month, our salesperson who has been with us the longest became upset when she missed her goals by less than a thousand dollars. Three years ago, she couldn’t have cared less.”
As Joe stated, “Traffic has decreased during the recession. We needed to do more with the traffic we had. So we now focus on increasing our average ticket and our closing rate. We created an accurate up system. In the past we kept poor records.”
By attending seminars and classes, Joe is also working on his leadership skills. He spends time with his people to make sure they are doing all they can to close every customer who comes in. Joe is focused on his CPVs. Is Joe good at business, or is he lucky? How about you?