The Fat Margins Performance Score Board is a tool that helps business owners close the gap between their company’s current profitability and what it could, and should be.
When you first went into business you had a vision of where you wanted to take your company and what you wanted it to ultimately become. Most likely, you expected it to grow and prosper; providing you with an above average lifestyle, a comfortable retirement income, and a strong sense of pride and accomplishment.
Unfortunately, if you’re like the vast majority of business owners, your company’s performance so far hasn’t come close to meeting your initial vision, and the gap between vision and reality continues to widen.
You feel as though you’re working way too hard and not earning nearly enough. You’re frustrated with the amount of effort required to earn a slim profit. Yet, even though you continue to struggle, you still have a deep-down feeling that your business is capable of earning far more.
Trust that feeling because it’s right on.
There really is more profit available…
Your company can earn a lot more than it does right now. According to multiple studies, only about 5% of all businesses ever achieve economic profitability, thus leaving a huge gap between what most companies earn and what’s possible.
A company achieves economic breakeven when it’s able to pay the owner(s) who are active in the business market value salaries plus market value benefits such as retirement and disability plans. It also must earn an appropriate return on the capital invested in it. Any profit earned in excess of breakeven is true economic profit.
It’s common for companies like yours to let 50% of their profit slip through their fingers. In many cases much more potential profit is lost than that. Unless your company is one of the 5% already knocking the ball out of the park, you’re leaving a significant amount of money on the table.
The main reason you’re losing so much money is that you’re running your company in the dark. It’s as though you’re a pilot trying to land your plane in dense fog without any instruments.
You’ve been forced to make decisions based on guesses, hunches, rumors, and conventional (and often wrong) business wisdom because nothing else has been available to assist you.
You’ve also had to pay attention to input from customers and employees whose advice is colored by their own self-interests and points of view. You’re flying blind because you don’t have sufficient factual information upon which to base your decisions.
One of the best decisions you can make, and one that will significantly improve your company’s performance, is to start insisting that you have information that’s timely, complete, and accurate. Once it’s available you’ll discover the power that having good numbers to work with brings. Your business will become more profitable and easier to manage. It’s as though the sun’s come out and burned off the dense fog so you’re now able to safely land.
Your current financial statements have limited value…
About the only information tool you have right now to help you run your company is the set of financial statements you receive periodically from your bookkeeper or accountant. More than likely the actionable information they provide ranges from limited to almost none for at least four reasons.
- They’re based on generally accepted accounting principles (GAAP)
Your financial statements are prepared following rules spelled out by generally accepted accounting principles (GAAP) and are primarily designed for outsiders such as banks and investors. They’re not designed to help you make day-to-day decisions and therefore aren’t laid out in a way that’s conducive for use as management tools.
- Financial statements are historical documents. By their very nature, financial statements can’t be completed until after the end of an accounting period. By the time they’re completed, they’re stale and of little use in managing day-to-day operations.
- Financial statements often mislead. Poor bookkeeping practices frequently result in financial statements that are inaccurate, many times to the point that they obscure results and cause misinterpretation of a company’s results. Some of the causes of misleading financials are that:
- It’s common to find transactions misclassified, such as when a bill for telephone service is mistakenly entered in the company’s books as office supplies.
- Revenue and expenses aren’t recorded in the proper time periods. For example, construction companies frequently record the full amount of a contract as revenue in the month a deal is sold, rather than spreading out the revenue out over the time period during which the job is performed. Another example of misreporting is when an entire year’s insurance premium is entered on the books in the month in which it’s paid, instead of the premium being spread out over the entire year for which the coverage is in force. The end result of these kinds of errors is peaks and valleys in reported profitability that don’t reflect reality and that confuse those who rely on them.
- Taking bookkeeping short-cuts adds significantly to the inaccuracy of financial statements. Arbitrary allocations of expenses are often charged to departments and branches without any realistic basis for the amounts charged.
Often far too many expenses are entered in the books as “miscellaneous,” which makes an accurate analysis of expenses nearly impossible.
Both of these practices are followed so that the bookkeeper doesn’t have to spend the time and effort required to properly charge them to the accounts in which they belong.
- Another frequent mistake is combining transactions that should be kept separate, making it impossible to closely monitor them. For example, sales revenue and returned sales transactions are often offset against each other, making it difficult, if not impossible for the number and dollar amount of returned sales to be determined.
Returns should be closely monitored because they’re very expensive to handle and can indicate other serious problems, such as the need for employee training, theft, poor buying skills, the use of high pressure sales tactics, and dishonest customers.
- One of the major causes of misleading financial statements is preparing them with an eye towards income tax savings. For income tax purposes, entering revenue on the books is postponed for as long as possible and expenses are entered as soon as possible; all in an effort to keep indicated profit, and therefore income taxes, low. While it’s wise to minimize income taxes, doing so can destroy the accuracy and usefulness of the statements as management tools.
- Top quality financial tools cost too much to prepare. Many business owners fail to recognize the value of accurate financial statements, and as a result, do everything possible to minimize their accounting and bookkeeping costs. They only do what’s necessary to bill their customers, pay their vendors, and complete their tax filings.
All of these practices cause a company’s financial statements to not only be confusing but to actually mislead.
To be an effective manager you need real-time data…
Financial statements are broad summaries of historical transactions that provide you with some guidance. However, they don’t provide the information you need to manage your company’s day-to-day activities. To effectively manage your business and maximize its profit potential requires having access to additional data on a real time basis.
For example, flying an airplane doesn’t require that the pilot know how much the passengers paid for their tickets or the cost of the fuel; both items that are found on an income statement. The pilot is only concerned with data not found on it such as weather conditions, weight, and fuel level. In addition, the plane has instruments on board that keep the pilot informed of its altitude, air speed, and a host of other indicators that immediately sound off if the plane starts collecting ice, fuel pressure drops, or some other hazard crops up.
Similarly, during surgery a doctor isn’t concerned with the fee paid by the patient or how much the anesthesia costs. Rather, the doctor is concerned with things like blood pressure, heart rate, and body temperature, all of which are checked and monitored before, during, and after the surgery.
Without the instruments and the monitoring, there would be many more plane crashes and more patients lost during surgery.
The same is true when running your business. Without sufficient real-time data, you’re unable to monitor its vital signs, and you’ll almost certainly never be able to fulfill your company’s potential and turn your initial vision for it into reality.
For your company to succeed, it has to target and acquire the right customers, ensure that sufficient orders are received, that they’re filled efficiently, and that they’re sold at prices high enough to include ample profit margins. If these actions are executed properly profit will be an automatic by-product. The more skillfully they’re accomplished, the more profitable your company will be.
To stand out in the eyes of your customers it’s vital that key metrics be constantly monitored to ensure that high performance levels are maintained. You need an early alert system in place so that errors can be fixed quickly, customer dissatisfaction can be uncovered and rectified promptly, and that changes in your marketplace be identified early on and accommodated in advance of your competitors.
The Performance Score Board developed by Fat Margins eliminates this information shortage. It easily, accurately, and quickly shows you how well your company is performing—both operationally and financially. You immediately see where it’s doing well and where it’s falling down.
A Performance Score Board provides you with:
- A set of contribution margin financial statements formatted for management use so they’re much easier to understand, making them considerably more helpful. A template is included so that the results of future operating periods can be effectively monitored, reported, and managed.
- The calculation and benchmarking of metrics tailored specifically for your business. Metrics can include items such as the following:
- Percent of revenue received from referred customers
- Number and dollars of revenue received from referrals, by referral source
- Customer acquisition cost
- Contribution margin earned per customer
- Customer defection rate
- Percent of revenue from repeat buyers and percent from new customers
- Average sale amount
- Average contribution margin amount
- Number of orders shipped per day
- Average order turn-around time
- Customer lifetime value and average life
- Dollar amount of lost revenue due to out-of-stock conditions
- A template that calculates your company’s economic profitability that can be used over and over going forward so that you always know where your company stands.
- A template that calculates your company’s approximate market value. The template can be used going forward so that you always know where your company stands.
- An analysis of the impact improving several sales, marketing, and pricing strategies and tactics would have on your company’s net income. You’ll be able to clearly see where slight improvements in your operating metrics will bring surprisingly large increases to your company’s bottom line. Knowing this enables you to focus on the strategies that provide you with the biggest gains.
With the aid of your Performance Score Board your decision making will be far better due to the clarity of the information you’ll have available to help you.
Here’s what some experts have to say…
Charles Kettering, who was a prolific inventor and head of research and development for General Motors during its heyday said: “A problem well stated is a problem half solved.”
Peter Drucker, the famed business management guru and writer said: “If you don’t measure it you can’t improve it.”
Albert Einstein said: “If I were given one hour to save the world, I would spend 59 minutes defining the problem and 1 minute solving it.”
A Performance Score Board brings real, long-term value…
With it you’ll be able to:
- Hold yourself and your people accountable for the accomplishment of company objectives. You’ll no longer have to rely on hunches when it comes to who’s performing and who isn’t. You’ll eliminate the ability for your people to pass the buck.
- Set goals and manage to them. Multiple studies have proven that people and organizations that operate using written goals far out-perform those who operate without them.
- Better protect your assets because your internal control systems will be strengthened. You’ll be able to spot discrepancies immediately and nip further errors and losses in the bud.
- Better manage your inventory, often reducing the amount of cash tied up in it. Out-of-stock conditions are also reduced, resulting in fewer upset customers and increased sales and profit.
- Change your management style from reactive to proactive.
Developing a Performance Score Board for your company will give you the tools and insight you need to leverage small changes in your company’s operations into large changes in its profitability. As an added bonus, the market value of your company will increase by $3 – $4 for every $1 of profit increase.
With the aid of your Performance Score Board, you’ll be able to get your company on track towards realizing the vision you first had for it.