Resources

It’s possible that you’ll need to look at averages from different sections of the Benchmarks pages. A good start is the averages from similar-sized firms (turnover), or a similar location-type (e.g. other CBD firms, etc.).

If your business is roughly ‘better’ than these averages, then spend most of your time comparing them to the average of the high-profit firms. This gives a challenging set of targets in a few key areas.

If your business is ‘below’ these averages, then concentrate on getting them to the average of these firms as your first objective.

For some expenses, look for more comparable averages; e.g. if the client’s firm is in a Shopping Centre, compare rental expense, other occupancy outgoings, advertising and gross profit margin with the averages from other shopping centre outlets.

Or if the business owns its premises, then interest cost and ‘other occupancy outgoings’ are best compared against other businesses with owned premises (i.e. excludes the renters).

Work immediately to boost the sales/fee income first – it’s quick and measurable. Low-cost communication with existing customers, outlining special offers is a great start.

Then look to tactics that will boost liquidity – collecting debtors more quickly; finishing work-in-progress so the client can send out the bill; lowering stock by reducing purchases in the next few months.

With ‘expense control’, concentrate on efficient buying and getting the right quality first. This is more productive than a ‘witch hunt’ to reduce usage.

• Make sure your advertising is effective – monitor each programme and either keep it as-is, refine it, or drop it. Don’t just change it for its own sake, if it works
• Make use of in-store displays and demonstrations
• Make sure the exterior appearance and identification of the business is clean, professional and helps customers find your store

• Employ effective, hard-working sales staff (and train and motivate all people to stay that way!)
• Seek referrals from existing customers
• Seek referrals from related businesses

• Increase the average sales size:
  • sell higher quality or enhanced features
  • use merchandising and display to group related products together or to promote seasonal lines
  • look at your stock and sales mix to ensure that they closely match each other
  • sell accessories or add-on products
• Increase repeat trade from customers:
  • through positive, friendly and helpful staff
  • sales staff members’ ability to understand customer needs
  • promoting only the products of genuine value to the customer
  • business image/appearance/housekeeping
  • provide regular follow-up
  • provide high-quality service

Avoid the factors that reduce your closing stock

• Eliminate shoplifting of minor items with vigilant staff; well-located cash registers; use of mirrors etc. to provide good supervision of all areas
• Eliminate staff pilferage of minor items, through suitable penalties, training, etc.
• Eliminate or minimise damage to stock while it is in storage or on display – place it in suitable locations and use display units to protect it
• Make sure that all stock received is checked against delivery dockets or invoices so that you only pay for what is actually received in good order and condition
• Make sure damaged stock is returned to the supplier for replacement or credit

Eliminate or minimise high-cost purchases

• Avoid placing too many small orders with high freight costs
• Avoid dealing with too many suppliers – you’ll lose quantity discounts
• Avoid carrying too wide a stock range (again, losing the scope for volume discounts)
• Take advantage of settlement discounts where they are worthwhile
• Plan purchases according to likely demand or seasonal factors

Eliminate ‘Depressed Sales Values’ from the level of stock sold

• Check your pricing practices (inaccurate cost prices lead to incorrect sales prices)
• Make sure you re-price stock (e.g. on old lines, or after a promotion)
• Make sure your sales mix blends sales of the low-margin items with sales of higher margin lines
• Improve merchandising and display to encourage customers to buy products they reasonably need
• Eliminate excessive discounting (e.g. ‘mates rates’) by your staff
• Minimise the extent of heavily-discounted ‘end of season clearance sales’

Check your pricing

• Adjust your markups so that your prices are not out of line with competitors’ prices
• Price some stock lines to keep customers coming back, then set a suitable margin on the related product sales
• Make sure all stock on hand is priced consistently (don’t let customers pick the cheapest from amongst identical items on the shelves)

General

• ‘Sales per person’ or ‘sales per dollar of wages’ are easier to understand, but ‘gross profit per person’ or ‘gross profit per dollar of wages’ are better indicators
• A high ‘sales per person’ ratio might just reflect high turnover and low pricing, but high gross profit per person shows genuinely higher productivity
• If a business positions itself as ‘up-market’, it probably has higher stock and higher overheads. Therefore it also needs higher gross profit per person if it is to make suitable profits
• Gross profit per person shows that there is more money available to pay overheads and to leave some profit for the owners
• If a firm’s result is within about 5% of the average, then there is not likely to be a major problem – however, if a firm’s result is 10% or more ‘worse’ than the average, then some investigation is warranted to find any underlying problem areas

Reduce the Amount of Labour Required

• Roster staff so that more people are available at the busier times
• Use a mix of core, full-time staff, supplemented with part-timers and/or casuals
• Make stock easy to locate, so that customers can find much of it themselves, and your staff become advisers rather than ‘gophers’
• Give customers some incentive to give you a ‘big order’ occasionally, rather than lots of smaller ones
• Promote special sales or special events to lift sales during the ‘quiet times’
• Use the quiet times effectively – restocking; tidying; cleaning etc
• Streamline your processes – make sales processing easy; have docket books or cash registers or EFTPOS terminals conveniently available to minimise waiting, etc.

Marketing and Promotion

• Promote special sales or special events to lift sales during the ‘quiet times’
• Use the ‘quiet times’ effectively – new displays; dreaming up promotional plans etc.
• Look at ‘companion selling’ – either create a package of several items or inquire whether a customer needs another, related product
• Create ‘clubs’ or ‘groups’ of customers and target special promotions for each one\
• Aim your promotions at keeping customers coming back
• Use other sales techniques (e.g. phone sales or letters) to supplement your primary sales efforts
• Measure the results of each promotion – ask people to ‘bring this ad with you’ or ‘respond on this order form’ to know which promotions are most effective
• Ask your customers what they want
• Look at the presentation of the outside and the inside of your premises
• Use display aids (point of sale, impulse items; signs; ‘specials tables’ etc.) to promote products
• Run staff competitions to focus on a particular product or type of stock

Pricing

• Decide your pricing strategy – ‘low margin/high turnover’, or ‘high margin/lower turnover’
• Stock products which are consistent with your market positioning
• Price as high as possible, given constraints from competitors nearby
• Some products (and therefore prices) are very easy to compare, so make sure those prices are close to competitors’ prices. However, some of the lesser, ‘companion products’ can be priced a little more fully if that suits the client’s pricing approach
• Put high-margin and/or impulse items in walkways, on counters etc. to boost the absolute level of sales from those items
• Work on lifting the gross profit margin – it will help boost gross profits per person

Staff Training

• Make sure your people know about the products – conduct in-house discussions about technical or usage features, so everyone keeps up to speed on these issues
• Share ‘successful sales techniques’ among your people
• Encourage your people to read trade papers, Association Journals etc. to keep informed
• Encourage free flow of information among your people
• When someone attends a training course off-premises, make sure they come back and pass on a few pieces of information from the course to all the other staff working in that area. This multiplies the value you get from the training course itself.
• Ask certain staff to become experts on particular product groups, so they can help other staff members and even run demonstration days or other functions for customers

Create ‘packages’ to better cross-sell

• Identify all the different products and services that your firm offers or support that you give to a customer – whether you charge for it, or not (e.g. ‘phone support’, advice, technical inspections, minor maintenance, newsletters or other information, etc.)
• Bundle some or all of those as ‘optional upgrades’ to the initial purchase – put an annual price on the package
• Make your clients or customers aware of the ‘optional extras’ – make it a routine part of your ‘sales process’, through training, incentives etc.

• If expenses are all higher than the averages, chances are the fundamental problem is that prices are too low
• If only some expenses are higher than the average, then action on only those specific costs is needed
• Increasing prices will make more revenue available without increasing the cost level, so the cost becomes a lower percentage

Look at the special features of the business, then make allowances for those

• If a firm is heavily geared around mail order or phone sales, then those costs should be higher
• If a firm has recently upgraded large amounts of equipment, then high lease/depreciation should be expected
• If a firm has a lot of employees and few owners, wages expenses will probably be higher
• If the firm is small, then some costs will be a high percentage, even though they may not be large in dollar terms (e.g. a $2000 expenditure on advertising in a $100,000 turnover may be necessary, just to match expenditure in other competitive firms)
• If an expense is within say 0.5% of sales of the average, it’s unlikely to be a ‘problem’. Concentrate on looking at the largest % variances first, then look to just minor savings in the other areas.
• Work on the controllable costs or the controllable parts of your outlays.
• Focus not just on reducing expenses, but on getting better value from whatever your client spends. This will almost certainly help you decide that some expenses aren’t worthwhile!
• Look to the major expenses first, and to the major differences in expense levels – obviously a difference of say 0.2% of turnover is not a major problem, however, once the variance gets to 1% or 2% of turnover, then some additional work seems warranted

Improved cost control comes from techniques such as

• Budget costs annually
• Review costs against budget regularly
• Ask whether each expenditure item is necessary?
• Look for better or less-costly ways of operating the business

Process / Volume / Price

Most costs can be analysed by looking at three component parts of the total: The Process; The Volume; and The Price. Each is looked at in turn, to show how this approach will diagnose a problem.

The Process – looks at the underlying activity which creates the demand for the cost

• Look at the flow of the product or the process – where does the material come from or go to?
• Is there excess handling – too many ‘pickups’ and ‘put downs’?
• Too many stops and starts?
• Have you looked at whether it’s better to do it ‘in-house’ or to sub-contract?

The Volume – looks at how much of the particular item you really need, compared to what you are presently using:

• Is some of the volume ‘wasted’
• Is there any theft? Unauthorised private use? etc.
• Is the incoming purchase properly recorded and paid for? Otherwise, you might pay for items not received
• Is the order or purchase of goods properly controlled, or can anyone spend money without proper review?
• Is ‘portion control’ needed to standardise the amount of the service required?

The Price Paid – this lets you tighten the way goods or services are bought

• Do you periodically put purchases out to competitive tender?
• Are you buying goods of too high a quality relative to the use?
• Can you benefit from bulk-purchase? Either by buying (e.g.) a year’s supply or by a co-operative order with a similar firm?
• Are settlement discounts worthwhile?

The outline can be used to review most expenses – e.g. phone calls, or insurances etc. It does not just apply to purchases of ‘stock’.

In the case of (e.g.) high phone cost, it could be applied like this:

Process – review the way people use the phone – do they plan calls to outline what has to be accomplished in a call? Do they make repeat calls because all required info was not obtained in the first call?
Volume – is every call necessary? Are all calls business-related? Could an email get the same info at a lower cost and time spent?
Price – is it cheaper to use a mobile or a desk phone? Is the firm in a ‘plan’ with the phone company? Can new technology such as VoIP / internet telephony provide cost savings?

• Look at the ‘Gross Margin Return on Inventory’ (‘GMROI’): divide it by 100 to convert it to a ‘multiple’ (150% becomes 1.5), then divide actual dollars of gross profit by this multiple. This will show the target dollar value of stock needed.
• This calculation can be done for each product line, or within each major product group, or for the whole firm overall
• Then you can help the client to set up a stock control system to bring it back into line
• Stocktake regularly, especially for the stock lines that sell quickly (this helps avoid stock-outs), or stock lines where the client has a large dollar investment. Set minimum and maximum stock levels for each stock item.
• Ruthlessly eliminate dead stock – return it to the supplier for credit if possible, otherwise sell it to ‘the trade’ or discount it to customers to get some cash back
• Look closely at the range of similar stock lines (do you really need to sell three brands of wood glue?) and the range of product sizes/packages you keep in stock (e.g. a ‘small’ and a ‘large’ tube of toothpaste, rather than five different sizes)
• Can stock holdings for individual product lines be reduced? Refer to the GMROI on each stock line, or to sales history information to work this out.
• Run special promotions to help clear some of the excess stock quickly
• Decide whether you want to continue supplying all of your current product range – should you ‘get out’ of any totally?
• Set a firm ‘purchases budget’ to limit the total outlay on stock in a given month. This helps the client to plan his/her purchases more carefully and target the purchases to the most important stock lines.
• Investigate whether technology (barcoding, scanners etc.) would assist to monitor stock levels and sales
• Encourage your client to keep working at this over a number of months – it’s unlikely to be ‘fixed’ in just one or two months, although the big decisions should be made early (e.g. rationalising stock range, and so on)

• Establish your payment terms as part of the establishment of any new debtor account. Advise all account customers periodically about your debtor policy.
• Offer a range of payment options, including electronic payment and credit cards, as well as account facilities
• Carefully review each request for credit – get trade references as a minimum
• Work out how best to handle large accounts, or those where ‘special arrangements’ have been made. Should these get the same treatment as all other accounts? Or should they be treated differently? Can you wind back some of the special arrangements?
• Prepare statements on time and mail them promptly
• Prepare an aged list of unpaid debtors monthly (at least)
• Consistently phone or visit slow payers – give one of your people the time, authority and autonomy to contact customers with unpaid balances, and make collection arrangements. The key issue is to contact slow payers regularly!
• Immediately stop further credit when the account becomes overdue
• Take legal action early

This is used as a base for our expenditure and profit comparisons.

Example:
Trading Income $100,000
Less Cost of Goods Sold 70%
Equals Gross Profit 30%
Less Expenses/Overheads 20%
Equals Net Profit (bos)* 10%

Reported as a % of income.

Expressed as a % of income

Reported as %s of income.

Note: In those sectors where businesses have contract employees, Employee Wages and Salaries often includes payments to ‘contract employees’ (in particular, this commonly occurs in the contractor sectors. Payments to independent sub-contractors appear elsewhere unless otherwise specified.

Reported as a % of income.
* bos – before owners salary

Total Profit before any Salary or

Drawing is paid to Active Owners
= ____________________________________
No of Active Owners, in full-time equivalents

* bos – before owners salary

Total Profit before any Salary or Drawing is paid to Active Owners
= ____________________________________________________

(No. of Owners) x (Hours Worked/Owner/Year)

* bos – before owners salary

(Retail Sales Only – COGS)
= ________________________________ x 100

Retail Sales Only

• Per Person
  All personnel, including working owners/principals, in full-time equivalents
• per Professional
  Number of Principals plus employed qualified professionals, in full-time equivalents.
• per $ Wages
  Total wages paid to all employees (generally includes a notional cost for the working owners, based on an arbitrary hourly rate times the number of hours worked by all the owners or principals). Where the latter is used, the relevant hourly rate is noted at the base of each report page. For some sectors the expenditure on sub-contractors is also included – where this occurs this is clearly indicated on the page.
• per Square Metre
  Total premises area in square metres
• per Seat
  Maximum seating capacity of the business (e.g. Restaurant or Coffee Lounge)

• per Vehicle
• per Completed Job
• per Driver and Delivery Staff
  All Drivers and Delivery Staff including working owners, in full-time equivalents.
• per Driver and Security Personnel
  All Drivers and Security Personnel including working owners, in full-time equivalents.
• per Consultation
• per Labour Hour
  Total Working Hours of Owners + (Number of Staff x 48 weeks x 38 hours per week)
• per Guest Room
  Number of Available Accommodation Units
• per Kilometre Travelled

Days’ Debtors Outstanding

Year-End Debtors Balance
= _____________________________ x 365

Total Sales to Account Customers

Days’ Stock on Hand

Value of Stock of Goods for Sale
= ______________________________________ x 365

Cost of Materials Used or Cost of Goods Sold

Days’ Work In Progress (WIP) Outstanding

Year-End Work-In-Progress Balance
= ______________________________ x 365

Total Sales or Fees

Number of personnel working in the business

This will generally be expressed as a number per staff category or as a ratio of staff per principal. In all staff-related ratios (e.g.. Personnel Structure or Personnel Productivity), full-time-equivalent personnel numbers are used. This converts part-time or part-year personnel to the equivalent proportion of a full-time position.

• Percentage of total premises area devoted to particular functions.
• Floor Area per person

Total Area in Square Metres
= _______________________

Total Personnel

% Revenue drops before Losses Start (‘Margin of Safety’)

Net Profit (bos)*
= ________________ x 100

Gross Profit

This shows the extent to which sales revenue or total income can fall before the business reaches its break-even point.

* bos – before owners salary

This ratio shows whether the client’s business is capable of easily funding a higher turnover base. A positive result for this calculation indicates that the business should be able to fund its growth from additional profits; a negative result suggests that the client might experience liquidity problems if they grow.

Growth Capacity calculation:

$ of Net Profit – ($ of Current assets – $ of Current liabilities)
= ________________________________________________ x 100

Turnover

Steps if the Growth Capacity is negative:

Increase profit

• Promote more of your high-margin products or services – this can flow through into a higher net profit margin
• Make your ‘production’ or ‘service’ processes as efficient as possible – this saves both overheads and labour
• Focus on cost control through the entire business – what you use; how much you pay for it; how much you waste
• See if you can reduce the owners’ drawings (whether they take the form of salary, or dividends or drawings) – this keeps more of the profit in the business

Reduce the amount of money tied up in the business

• Reduce stock levels, if this can be done without losing sales
• If your business has a lot of WIP (work-in-progress), re-design your work methods or policies so that jobs are completed more quickly, or negotiate staged billing of your customers at key stages during the production process
• Clearly outline your trading terms to customers, and make sure that someone in your business follows-up the slow payers regularly; bill promptly
• Have enough cash to cover the foreseeable needs, then use the balance to reduce interest-bearing debt
• Stretch creditors as far as possible within their trading terms

The one constraint is to keep a sensible ‘current ratio’ while all this is happening: Long-standing rules of thumb talk about current assets being around 1.5 to 2 time’s current liabilities, in order to be commercially sound. Retailers usually have slightly lower levels, due to the high cash component in their sales.

Each category of the balance sheet is expressed as a percentage of Total Assets. The asset base excludes loans to principals or owners; equity has been adjusted by adding back any loans from owners or principals and deducting any loans to the owners or principals.

Owners’ Equity

Reported Owners’ Equity + Loans from Owners – Loans to Owners
= ______________________________________________________ x 100

Total Assets – Loans to Owners and Related Entities

Asset Turnover (times pa)

Total Trading Income
= __________________________________________

Total Assets – Loans to Owners and Related Entities

Stock Turnover (times pa)

Cost of Goods Sold
= _____________________

Closing Stock Value

Assets per Person

Total Assets*
= _____________
Total Personnel

* where Total Assets excludes Loans to Owners/Principals and Related Entities.

Gross Margin Return on Inventory (GMROI)

Gross Profit
= ___________________ x 100

Closing Value of Stock

This breakdown differs according to the particular sector that is being processed. The professional sectors use the type of work undertaken as a % of total fees. The retail sectors use the type of product sold as a % of total sales.

The hourly charge rate per personnel category is used in professional and trade sectors where fees and charges are based on the time taken to complete a job.The hourly charge rate per personnel category is used in professional and trade sectors where fees and charges are based on the time taken to complete a job.

Average Consult Numbers x Consult Length (in mins)
= ______________________________________________ x 100

38 hours x 60 minutes

Total Hours Charged to Clients by all Personnel
= _________________________________________ x 100

Total Hours Worked by all Personnel

Total Net Profit (before owners’ salaries & remuneration)
= _____________________________________________

Total Interest expense

Higher results show that the firm is highly capable of servicing its interest expenses. In many of our questionnaires, Interest cost is not reported on its own – it also includes Bank and Credit Card charges. As a result, many of our calculations divide total net profit by the combined cost of interest and bank fees.

A second ‘Interest Cover’ ratio is also calculated (at the request of the finance industry). This second calculation adds personal interest paid by the owners (e.g. on home loans or personal loans etc) into the Interest expense of the business, so it shows a total capacity to cover all interest costs (this is particularly relevant in sole trader or partnerships which are not operated through a company or trust structure).

Total Current Assets
= _________________________

Total Current Liabilities

A higher figure is considered better here.

Total Current Assets – Inventory
= _____________________________________

Total Current Liabilities – Bank Overdraft

A higher figure is also considered better here. Inventory is rarely all replaced in a month, and bank overdrafts are not often called in for total repayment so both components are excluded from the remaining current assets (e.g. cash, accounts receivable etc) and current liabilities (e.g. trade creditors and other short-term debt).

Cost of Goods Sold
= _____________________

Value of stock on hand

Our calculations are normally based on the value of stock on hand at year-end. However a better overall guide can be obtained by either averaging the values of stock at the start and finish of the financial year, or (even better) by averaging month-end stock values.

Total Revenue
= ________________________________

Total Assets – Loans made to owners

Higher results show that assets are being used more-productively to support or generate revenue.

Total Revenue
= ___________________________________

Total Liabilities – Loans from the owners

Higher results give more confidence that debts can be paid when they fall due. Loans from the owners are treated as equity for the purpose of this calculation.

(Cash on hand & at Bank + Trade Debtors + Current Assets incl GST Clearing A/c)
__________________________________________________________________

(Trade Creditors + Other Current Liabilities incl GST Clearing A/c)

The Acid Test determines wether or not a business has enough short-term assets to cover its immediate liabilities, without having to sell inventory.

Total Assets – Loans to owners
= __________________________________ x 100

Total Liabilities – Loans from owners

Generally ‘more’ equity increases the safety of the business, since its actions are not as susceptible to decisions made by lenders. However, more use of debt (therefore lower equity as a % of assets) can increase the rate of return achieved on the firm’s equity.