April 24/May 1, 2017: Volume 31, Issue 23
By David Romano
Dear David:
Every time I go to convention, read articles and talk to my membership consultant I hear that I am supposed to have a 10% bottom line. However, I am not even close and I feel I run a pretty tight ship. What is a good bottom line and how can I increase my performance?
Dear Owner,
Increasing your bottom line should be top of mind every day. Getting to that optimal level of performance requires constant monitoring and swift action. It also requires an intermediate understanding of financials, in-depth knowledge of your operating system and the desire to make changes.
A bottom line of 10% is simply a magical number. There is a small percentage of flooring dealers with that level of profitability and most are either very small (less than $1 million) or fairly large (over $15 million). In fact, the average flooring store generates just over $2.6 million in volume with a bottom line less than 1%. The silver lining is the small percentage of top performers generates a bottom line of nearly 12%.
What are the top performers doing differently from everyone else? They are just running a better business. Their sales volume is nearly identical to the average, their gross profit is less than two points greater, but where they really shine is how they control all their general operating expenses. If you want to make more money you need to have better controls/systems and a lot of discipline.
Here are some industry metrics to consider when analyzing your performance:
- Personnel costs should be no more than 18% of net sales. Top performers show this cost just above 15%.
- Occupancy costs should be less than 6% of net sales. Top performers show this cost just below 5%.
- Advertising and promotions should be less than 2.5% of net sales. Top performers show this cost just above 1.5%.
- Other general and administrative expenses should not be more than 8% of net sales. Top performers show this cost just above 5%.
I would venture to say that if you took all your expenses below the gross profit line and analyzed them, you would find a way to reduce many of those expenditures. Sure, sales and margins are important, but the real opportunity lies in squeezing as much juice from all areas of the business. Following are some places to start:
Telephone. Look at switching cell carriers, transition to a VOIP phone system and limit the amount of data for all cell lines.
Occupancy. Get Nest to help control the climate, look at reducing the frequency of your disposal pickup and reconcile inventory to the proper level to reduce property tax.
Personnel. Analyze your manpower plan to see if you are overstaffed. Do a market compensation audit to ensure you are not overpaying. Switch to a pay-for-performance plan for revenue generating positions, etc.
Advertising and promotions. Review your mix of traditional vs. online media to get the best return on your investment.
General and administrative. Look at those over 20 lines and shave a bit off each. Can you reduce your entertainment budget, office supplies, insurance policies, vehicles, etc.?
I also suggest you enroll in some basic financial and managerial accounting courses. Then spend time going line by line to determine what needs to be done, when and by whom.