In the last column I gave you a 50,000-ft. view of NAPL’s Management Plus Program and just touched the various components of the program. As I’m sitting here on a hillside in Puerto Vallarta watching the ocean (for another 4 days) the economic meltdown seems a bit unreal and almost just a news story on CNN. But for those of you running businesses it’s more important than ever to have hard and fast data. I think it’s critical to have this info at your fingertips and that’s why I want to drill down into the Financial Performance of the program and walk you through the 13 financial ratios that it works with. They’re called Key Performance Indicators or “KPI”. This will be a fairly technical column and a bit different from the usual style but I think the content is really worthwhile.
In NAPL’s opinion KPI analysis is about focusing on what’s most important; anticipating trends, not just tracking trends; and improving continuously by aggressively building strengths and correcting weaknesses. This approach is fundamental in most of the “excellence” business models we’ll discuss in this series of articles. Before we go any further here are the 13 ratios.
- Value added sales
- Gross profit/Value added
- Value added/Factory payroll dollar
- Value added/Factory payroll hour
- EBITDA/Value added
- EBITDA/Net total assets
- Receivables days outstanding
- Spoilage/Rework percentage
- Sales per employee
- Value added per employee
- Sales per sales rep
- Value added per sales rep
I know it all sounds very complicated and technical but this is one time when I think that what you take away will be well worth putting up with the theory.
The first ratio, Value added sales, (sales minus outside purchases) let’s you know what’s really happening on the top line. The ratio tells you what percentage of revenue a company creates and what percentage it buys outside, or as one Performance Indicators participant puts it, “The percent of sales that stays with us.” In fact, in some companies this number is so important that they use it as the basis for sales commissions.
The next three ratios, Gross profit/Value added, Value added/Factory payroll dollar, and Value added/Factory payroll hour are your clue to what’s happening in the factory. Gross profit (sales minus outside purchases and factory expenses) to value added tells you how much you have left per dollar of value added after covering total factory expenses. Value added to factory payroll dollar tells you how much value you create per dollar of factory labour (direct and indirect). Value added to factory hour, a measure of factory productivity, tells you how much value you create per hour of direct factory labour.
Ratios five, six, and seven, EBITDA/Sales, EBITDA/Value added, and EBITDA/Net total assets give you information on the “real” bottom line. Interest, taxes, depreciation, and amortization don’t tell you much about a company’s real earning power so that’s why NAPL looks at EBITDA—or earnings before interest, taxes, depreciation, and amortization.
Ratios eight and nine, Receivables days outstanding and Spoilage/Rework percentage, deal with getting paid and controlling quality in your shop. Receivables days outstanding is the ratio of accounts receivable to average daily sales while the Spoilage/Rework percentage is the total cost of remakes for which you’re not getting not paid as a percentage of sales.
The last four indicators, Sales per employee, Value added per employee, Sales per sales rep and, Value added per sales rep are relatively straightforward metrics. Their meaning is certainly changing as diversification beyond ink-on-paper redefines the services you might be offering and the types of staff employed, but comparing sales per employee and sales per salesperson figures with the corresponding value-added figures should give you another read on the critical question of what’s really happening on the top line.
I spoke to Robin Schabacker at NAPL about the program, and she told me that, unfortunately, Canadians rarely enter so I hope this column generates enough interest to get a Canadian trend group going.
Robin said that participation in the program has only three criteria. Data must be submitted, monthly, within five weeks of the close of the month and according to the program definitions. (See www.napl.org). New participants need to submit two years of historical data on each performance indicator to support trend analysis. She also told me that the basic service is FREE! Participants in the basic performance indicators service receive monthly comparisons of their results against the group average and comparisons of the three-, six- and 12-month trend of their results against comparable group trends.
I know this has been a bit technical but I hope you found it helpful and that some of these ratios find their way onto your dashboard.