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Capturing multi period data from Excel

How to load your data 

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Part 1. Pricing for growth and superior margins

azpricing 1a

At the end of the day this industry has to create value based on a commodity product that essentially is driven by price.

Players in this segment have to find ways to compete that allows them to make money and deliver sustained organic growth. The owner of these business knows the way they manage price can be the one singular distinction between success and failure.

The problem

If you in the industry price fluctuations come from every angle and they happen in rapid succession.

  • Your vendors change prices as the commodities prices fluctuate
  • Your customers demand different prices due to specific projects
  • Your competitors make you respond to their pricing structures

The problem is further complicated as you have literally hundreds of SKU that you are dealing with.

For example, take one category item you sell 2x4 lumber and they come in a variety of sizes 10’, 12’,16’ and say 20’ and you may have to change prices for this item based on

  • A specific customer
  • A specific job for a length of time
  • A type of customer, walk in, wholesaler and contractor
  • Based on the volume the customer purchases that provides specific rebates due to volume purchases.

If you don’t have an effective process supported by an easy to maintain ERP system the maintenance of this pricing is a nightmare.

The consequences are severe

  • High cost of people to maintain the pricing structure.

We reviewed a client with a $20M business and they had 4 clerks whose primary job was price maintenance.

This is a high non-value add cost.

In addition, the cost of fixing mistakes or rework was significant. 18% of all invoices had to be redone each month due to pricing errors.

  • Lost margins

We are not sure where to begin with this topic. There were lost margins due to

  • - Vendors price changes and the inability to respond fast enough to change the sell price to the customer
  • - Historical prices that should have been increased but were not
  • - Simply incorrect prices that were not identified
  • Lost sales
  • - Due to wrong price quotes customers purchased from the competition
  • - Customers simply purchased elsewhere due to continuous wrong pricing

We attempted to do an assessment of the financial impact on the above pricing consequences. The conclusion was that there were 3 percentage points lost at the gross profit level and 4.5% of gross sales lost at the top line. This is what we could substantiate based on the data we believe that that it could have been far more significant.

 

azpricing 1

 

What you don’t see you don’t miss…. Until you make it visible. When the owner reviewed the business case (in great depth) and realized that this opportunity delivered in the business case was real it certainly became a priority.

By doing this the owner could convert a 7.5% EBITDA business to a 12% EBITDA business within the existing business model.

Not only did this exercise reveal a significant loss in bottom line opportunity but it also highlighted the importance of working on the business as opposed to working in the business.

Opportunities for improvement like the above example are not easily visible they take effort and sound analytical skills however having the discipline to work on the business on a regular basis will be a significant differentiator in the performance of your business.

The solution

All solutions at least when it comes to the Science of Business Wealth methodology is focused on 3 things

We call it the PPT solution

  • - People
  • - Process
  • - Technology

For now, we will focus on the process and technology part of the solution. The reason if these two areas are in good standing you know what the problem is.

Process

  1. Document the process
  2. Support the process with checklists where necessary
  3. Ensure perpetual adherence to the process
  4. When errors happen identify where in the process the error occurred
  5. If it not a process issues you have the wrong people. Make the necessary changes.

Technology

We were very fortunate here, by accident we came across a ERP system that has been in existence for some 20 years and was designed specifically to the building supply industry.

We were so impressed, we contacted the owner Larry Wadsworth of JLW Software and his team to find out more about his A-Z system capabilities.

We are aware of the major players in the industry EPICOR with their CATALYST system, DSMI, and many others. By no means are we saying that these systems are inferior in anyway but we were drawn to the simplicity of the A-Z capabilities

The problem we had was that the A-Z system did not even have a website. They have a great user base that has been established over the years by reference only. Quite impressive.

The power of simplicity and ease of use was the first attribute that drew our attention. It was like someone took the traditional source documents and placed it into a system that was just so intuitive we were able to navigate our way around with ease without any reference to a manual or some training program.

When it came to price maintenance the process was extremely powerful. You have the capability to set pricing based on a time period now or in the future

Price changes were driven by a price sheet that was either customer based or project based. Maintenance was extremely simple by either changing the whole price sheet or specific items within the price sheet. You even have reminder that certain items prices need to be reviewed.

 azpricing 2

The price maintenance can be done by the same person who does the invoicing. This allows for the accountability and margin measurement to be placed where the action is. Reducing the non-value-added work by 3 people!

azpricing 3

In addition, when we inquired as to the system price we were provided with a cost structure that was about 20% of the existing clients ERP system.

Lessons learnt

  1. Working on the business ensure the strategic focus and priority settings to areas where you will maximize your performance and sustained growth
  2. Ensure the systems you use are easy to use and do not create unnecessary costs within your business
  3. Have the right controls in place. This includes sound processes supported by accountability to those processes
  4. You get what you measure


 

Coming next

  • - NTO and how to make Notice To Owners effective and low cost. Helping you to protect the money that your contract customer owes you
  • - Volume rebate management
  • - Production or assembly cost management
  • - Keeping your accounts receivable lean
  • - Inventory management

What we do at the Science of Business Wealth

We deliver outperforming business making your team accountable to your business expectations.

You know your business, we extract the hidden potential within your business as measured within your financial statements. Delivering more profit improved cash flow and greater returns.

Our programs include

Running the business by the numbers

A disciplined operating system that makes your business accountable to your financial statements

Starting from $2,000 per month. Expect a 10% profit improvement, 15% cash flow improvement and ROCE improvement of 8% - 15%

Business Health Test

The Business Health Test uses your financial statements to measure the impact of decisions and strategy. The process identifies the gap between how well you are doing and how well you can do.

We use this gap between how well you are doing and how well you can do, to motivate future improvements with actionable accountability.

BHT delivery platform

az what we do 1

Cost $1,000.

Financial statements diagnostic and what if tool

Use your financial statements to

  • - Discover the effectiveness of your strategy and decisions based on 5 key performance metrics
  • - Perform “what ifs” on profit cash and returns based on doing something different to your business
  • - Automate the budgeting process by instantly delivering future income statements balance sheets and cash flow statements
  • - Communicate your performance to bankers and others
  • - Evaluate the impact of adding on a new customer or product category
  • - Evaluate a potential business acquisition
  • - Set key performance criteria for your team. Creating measured accountability to profit cash and returns.

Cost: $660.00 per annum

Delivery: Web based application

For further information as to how the Science of Business Wealth can help your business contact Mick Holly at This email address is being protected from spambots. You need JavaScript enabled to view it. or 704-904 0994 or visit us at https://scienceofbusinesswealth.com/

Our podcasts can be found at:

https://itunes.apple.com/us/podcast/science-business-wealth-helping-owners-turn-their-business/id1311834530?mt=2

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Marginal Income Ratio (MIR) Dilemma

The MIR can be a powerful and fast way to evaluate your next business case. Be aware of potential false precision potholes that you may encounter


MIR1a
It was a cold Saturday morning and Jack Frost was pondering about the interview he had on Friday with Sally Bigsales. Jack liked using his Saturday morning for what he called working on the business.

Sally was most impressive and the time has come to grow again there has been a period of stagnation within the business and Sally could just be the required medicine

Sally articulated he plan that looked most achievable with an expectation to get an additional $1.5M in revenue

To determine Sally’s benefit case Jack deploys the Marginal Income Ratio (MIR) tool.

As a way of a quick introduction.

MIR is the contribution to operating profit based on the next revenue dollar or the dollar growth that you are anticipating in your business.

MIR is also used to determine the Break-Even Sales (BES) that are required to cover the fixed costs and make no profit.

Jack extracted a summary income statement for the last 12 months. To do this he defines his variable and fixed costs.

Variable costs are those costs that vary in direct proportion to revenue changes. Commission paid to salespeople are a good example of this. In Jack’s case, his variable costs were to a third-party warehouse that performed his shipping and logistical functions.

MIR1.png


Keep in mind costs don’t behave the way you classify them they behave the way you manage them.


mir2.png

Jack was reasonably proud of his accomplishments with operating profit (EBITDA) at 9% on his total $12M of revenue.

mir3b

To define his MIR Jack isolated the variable costs and deducted these costs from revenue. This delivered what Jack called his Marginal Income (MI). Representing the contribution before to his fixed costs and required profit.

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The next step is to determine his fixed costs. Jack wanted to know the “cost base” that his marginal income had to cover. This included his fixed costs plus the current profit that he was achieving.

mir1

Jack knew that Sally would costs him a base of $80K to deliver the additional $1.5M in revenue.

n1

The next step was to determine the new cost base with the know information. This was relatively easy starting with the existing fixed costs he added the additional cost for Sally plus his achieved profit.

Jack pondered on what his expectations were if Sally was to deliver her required sales. His thought process was that he at least wanted to see a 10% growth in operating profit.

n2

With all of this in mind the revised cost base was now $2.498M. The new revenue to produce cover this costs base (fixed costs plus required profit) was close to $13M simply calculated by dividing the MIR into the cost base.

The additional revenue required to achieve the goal is close to $1M. Knowing that Sally plan should deliver $1.5M Jack gut feel was now been supported with sound evidence.

Jack thought about the guys at the Science of Business wealth and smiled, what did they always tell me “Passion for intuition Powered by evidence”. This is what working on your business is all about.


What Jack did not realize is that he was potentially falling into the what we call the false precision trap


Jack being a conservative fellow stress tested his revenue capabilities going forward combining his expectation of what his current business growth and Sally new revenue would look like

n3

The total estimated revenue growth would be $2.7M with the required growth to cover his additional profit and Sally’s costs to be close to $1M. Why would this not work Jack thought.

He quickly computed what the income statement would look like based on the minimum required revenue

n4

Jack smiled with $13M in revenue I can deliver an EBITA of $1.188M giving me my additional 10% profit growth and the possibility is that I can easily exceed that revenue going forward.

As the story goes a year later in the traditional Saturday working on the business session Jack reviewed his results. The following income statement lay before him.

Jack knew things we not going as well as he thought but he did monitor the revenue growth and that was going to plan and thus over time he believed it would get better.

n5

Now that the full trading year had passed Jack wanted to gain insight on the results. Looking at the bottom line first (isn’t that what we all do) Jack looked into his cup of coffee and thought that it needed something stronger than pure coffee in it.

Jack pondered. I know I am all over my costs and they have not increased, I can also see that my gross profit margins have declined slightly but that could not be the reason for this relatively disappointing result.


What happened with all this revenue I am making less money


Jack did a side by side comparison with the previous year showing how the additional revenue impacted his profit.

It was most disappointing to see the additional revenue of $2.7M delivering $148K less in profits, all that work for basically nothing.

 n6

But what puzzled Jack was the additional margin. $87k additional margin on $2.7M additional revenue computes to a little over 3% margin. There was no way that Sally or anyone delivered their revenue at those margins.

What happened. Sally introduced a new customer loyalty program that provided her customers with a 10% discount. Jack had authorized this program and thought it was quite innovative. His previous policy was to sell value not price. The success that Sally brought to the business was impressive. This tactic was quickly adopted by the other sales people and the new customer loyalty program over time became a standard offering. The result was not that impressive.

What was originally intended to bring in new customers became the standard behavior for the other sales people.

 n7

At the end of the day the average discount amounted to a little over 5%. This translated to a net deficit in operating profit of $148K.

What is the moral of the story we call this false precision as Jack did the right calculations. He even stress tested his ability to attain the additional revenue what Jack did not do was stress test his MIR.

n8

IF Jack at the time of deciding on the Sally strategy said what if my marginal income ratio declines. At what level do I need to ensure that this ratio does not fall below to still provide me with the profit that I require.

mir14.png

If Jack had done this his focus on margin management might have been very different.

Jack weekly scorecard now reflects the average margin percentage that he is attaining.

In summary, the MIR tool is an effective way to assess a business case. The key pitfalls that need to be looked at must include.

  • The additional revenue safety cushion.
  • The sensitivity to changes in the marginal income ratio
  • What would happen if costs behave differently than expected.
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HOW TO READ FINANCIAL STATEMENTS LIKE A BOOK IN 5 MINUTES INTERACTIVE COURSE

read1Rapidly learn the language of business

  • Enhance your career if you are in business this is a critical skill for you advancement.
  • Help your clients with their financial goals
  • Know how your business is performing and what you need to focus on to make more profit, cash and improved returns
  • Know how to speak to your banker
  • Know what to look for when you want to invest in a business
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The 7 stages of working ON the business

Through our observation and studies, we have identified 7 stages of evolution that an organization goes through when it comes to working ON the business.

These stages are not definitive many organizations show tendencies to mix components of each stage yet the successfuls master each stage before progressing in an effective manner to the next.

There are many conditions that determine the velocity of the evolution but in the main the key variables that create either constrains or rapid progress include

  • Leadership
  • Culture
  • Money

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What to say - When talking about your clients financial statements

All you need is the income statement and balance sheet

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Investor ready checklist - Questions to ask you client

How to use this checklist

  • As a way to engage your client towards business improvement objectives
  • Help clients who are thinking about selling their business
  • For clients who are looking for aspirational change.
  • Remember Investor Ready is not only for business owners that wish to exit.

2 components to the checklist

  1. Questions to ask the owner

Use these to gain a perspective from the owner

  1. Validation of the owners perspective
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CPA power

By now it is well known that the CPA either internal or external to the business is expected to be “more strategic”

But what does this more strategic really mean!

The answer is to look at what business owners need and want.

Owners and business managers at their core strive to improve how effectively the business competes. The ultimate scorecard of this result is reflected in the financial statements. And who is the owner of the financial statements the CPA of course.

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Strategic growth rate – the new standard or is it

Congratulations revenue growth as the main measure is slowly been challenged.

We all love growth as an easy measure of success (and failure)

As I always say when you change the way you look at things the things you look at change. (I have needed to use that expression a little more than I possibly would like)

Recognition is now placed not only on growth as the key measure but a combination of revenue growth and EBIT growth as the new strategic measure.

Strategic growth is now measured as the amount of the revenue growth % plus the EBIT or profitability growth %.

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Improving Operating expenses

The second of the 5-chapter Science of Business Wealth financial performance evaluation is profitability growth.

Practitioners of our Business Health Assessment mention “I can show the results but how can I help the improvement process”. This diagnostic evaluation process is aimed at helping you through that journey.

Remember you goal is to identify where improvement or opportunity lies. The business owner will know how to take your analysis and make it actionable.

Profitability growth is measured by the increase in profit per revenue $ from one period to the other.

The core components of profit performance is:

  • The performance of gross profit from the previous period to the current period.
  • The way operating costs have behaved from the previous period to the current period.

Profitability is considered in relation to revenue growth.

The question is “has profitability improved irrespective of whether revenue has grown or declined”

Profitability growth is a good indicator of how scalable the business is.

This part of the diagnostic series deals with operating cost performance.

Tool kit

  1. Segment the operating costs into Fixed and variable costs
  2. Horizontal analysis
  3. Vertical analysis
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Improving Gross Profit

The second of the 5-chapter Science of Business Wealth financial performance evaluation is profitability growth.

Practitioners of our Business Health Assessment mention “I can show the results but how can I help the improvement process”. This diagnostic evaluation process is aimed at helping you through that journey.

Remember you goal is to identify where improvement or opportunity lies. The business owner will know how to take your analysis and make it actionable.

Profitability growth is measured by the increase in profit per revenue $ from one period to the other.

The core components of profit performance is:

  • The performance of gross profit from the previous period to the current period.
  • The way operating costs have behaved from the previous period to the current period.

Profitability is considered in relation to revenue growth.

The question is “has profitability improved irrespective of whether revenue has grown or declined”

Profitability growth is a good indicator of how scalable the business is.

This part of the diagnostic series deals with gross profit performance also known as above the line performance.

Gross profit diagnosis follows a similar structure to the revenue diagnostic with the key difference is that we include the way gross profit behaves within the different forms of revenue segmentation.

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Good Growth diagnostic evaluation

Basic diagnostic methods

  1. The only 4 ways to grow
  2. Segment according to the 80/20 rule
  3. Segment according to customer behavior (Customer retention)
  4. Purchase frequency
  5. Revenue by product or service

 

The first of the 5-chapter performance evaluation is revenue growth.

Practitioners of our Business Health Test mention

“I can show the results but how can I help the improvement process”.

This diagnostic evaluation process is aimed at helping you through that journey.

Remember you goal is to identify where improvement or opportunity lies. Management will know how to take your analysis and make it actionable.

Growth is measured by the % increase in net revenues from one period to the other.

The concept of good growth measures how growth impacted profitability and balance sheet performance.

Good growth is reflected where the growth produces improved profitability with the same of less working capital per $ of revenue

Notice that we say good growth is the combination of how growth be it up or down influences the income statement (profit) and the balance sheet (working capital)

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Mick Holly & Andre Gien

Wealth Scientists

You want to grow your business and have peace of mind?

Click here to learn the Science used by Successful Entrepreneurs.