From Inside the Vault...

5 KPI's to Measure the Productivity of your Business

Posted by Bill McDermott on Wed, Sep 14, 2016 @ 12:09 PM

I’m a big believer in managing your business using your balance sheet first, then your income statement.   However, simplifying that by using KPI’s (key performance indicators) can help you get a quick view of your financial landscape and determine your financial health at a glance. Here’s 5 KPI’s that every business owner should use. These are in no particular order, but they cover profitability, liquidity and leverage.

  • Working Capital KPI: This KPI is calculated by taking current assets- current liabilities. The more current assets you have in excess of your current liabilities, the more liquid you are. If you liquidated all your current assets would you have sufficient funds to handle all your current liabilities and some money left over. The idea here is do you have enough assets to meet your short term financial obligations?

For example, if your current assets total $500,000 and your current liabilities total $250,000 then your working capital is $250,000 (500-250). You have $2 dollars of current assets for every $1 of current liabilities. 

  • Return on Equity KPI: This KPI is calculated by taking net profit/shareholder equity. It measures the ability of the company to generate a profit on each unit of shareholder equity. The return on equity not only provides a measure of your profitability, but also the efficiency of the business. An increasing ROE shows shareholders that you’re using their investment to grow the business.

For example, if you had a net profit of $200,000 and your shareholder equity was $500,000, then your return on equity was 40% ($200/$500).

  • Debt to Equity (Leverage) Ratio is calculated by taking total debt/total net worth. It measures how the organization is funding its growth and how effectively they are using shareholder investments. A high debt to equity ratio is evidence that an organization is fuelling growth by accumulating debt.

For example, if your total debt is $1 million and your total net worth was $250,000, then your leverage ratio is 4 to 1 ($1 million/250,000). You have $4 of debt for every $1 of total net worth.

  • Accounts Receivable Turnover KPI is calculated by taking revenue(annualized)/accounts receivable. It measures the rate at which you collect on outstanding accounts. The problem in maintaining a large bill for a customer is that you are essentially giving them an interest free loan.

For example, if you have $3 million in sales and your accounts receivable balance is $500,000, then your accounts receivable turnover is 6 times ($3 million/$500,000). To convert this in to days, you take 360 and divide it by the turn, 6. With 360/6 = 60 days, this means you have two months of sales outstanding in accounts receivable.

  • Accounts Payable Turnover KPI is calculated by taking purchases (annualized)/accounts payable. This KPI shows the rate at which your company pays off suppliers and other expenses. It’s also important for understanding the amount of cash that your business spends on suppliers during any given period. 

If your purchases total, $2 million and your payables balance is 200,000, then your accounts payable turnover is 10 ($2 million/$200,000) to convert this to days, take 360/10 and you come up with 36 days of purchase in accounts payables.

You might be thinking, once you calculate these KPI, are my numbers good or bad? Great question! You might want to calculate your KPI’s historically (over the last 3 years or so) to see what direction they’re heading. You may also call your industry association to see if they provide any information on industry KPI’s. I had a mentor tell me one time, you have to “inspect what you expect.” If you can’t measure, you can’t manage it. I hope this article was helpful in giving you some focus on 5 important KPI’s.

Topics: balance sheet, debt, entrepreneurship, small business, strategic planning, cash flow, credit, profitability coaching, income statement, business health checkup, business owners, cash flow planning, growth, profitability, leverage, profit & loss statement, activity, execution, liquidity, strategy

Two KPI's to Watch As Labor Costs Rise

Posted by Bill McDermott on Fri, Sep 9, 2016 @ 10:09 AM

Have you noticed lately that you have to spend more to get the top talent in your industry? There’s a war for talent out there and increased wages, signing bonuses and guaranteed commissions can really increase your cost of doing business.

I have several clients in the professional services arena and they are keenly aware that their ability to pass on the increase of their recent hires to their clients in the way of increased fees is an issue that can quickly eat into their profit margin. Having people like that on your bench and unbillable can be a disaster.

There are 2 key performance indicators that all firms should keep in mind, but especially in professional services. That is their labor utilization rate and their net multiplier.

The labor utilization rate is measuring how much of salaries and wages can be attributable to revenue generating activities. It’s calculated as direct labor in cost of services/total labor, which includes wages in overhead.

For example, if you have direct labor of $500,000 and total labor including overhead of $1 million, you have a labor utilization of 50% (500,000/1,000,000). This means that you have half of your labor doing non-revenue generating activities. Obviously, the higher percentage you have to revenue generating activities, the more profitable the business is likely to be. 

Also, if your bookkeeper/accountant is not properly allocating your labor costs, your financial reports could be giving you a picture that’s not reality. The way to get this number up is to allocate as much of your labor force as possible to revenue generating activities and allocate the cost correctly.

The net multiplier is a measure of the markup on labor costs and is calculated by dividing net revenue by direct labor. If you’re paying more for talent, but not increasing fees to compensate, this will show up in this KPI. For example, if you’re direct labor is 500,000 and your net revenue is $1.5 million, you have a net multiplier of 3. This means for every $1 dollar of direct labor, you generate $3 of revenue.

The way to drive the net multiplier up is to increase fees and billing rates (price) or increase overall revenue (volume). Creating a culture that promotes good project management and sticking to budgets and timelines is important.

If you’re managing a services company, these two KPI’s and managing them well are critical to your success. Of course, remember that your top talent is your competitor’s prime hiring targets so focus on retaining your top talent because it will be expensive to replace them (in lost revenue, opportunity costs and recruiting fees) if they leave.

Topics: entrepreneurship, small business, strategic planning, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, service, key performance indicator, people, strategy, process

The Power of Being 1% Better

Posted by Bill McDermott on Wed, Aug 17, 2016 @ 11:08 AM

We’ve all probably been watching the Olympics lately. Katie Ledecky won 5 gold medals and broke her own world record in the 800-meter freestyle. I’m fairly confident that what drove her achievement was a combination of talent and her dedication to training at a consistently high level. She may have been committed to being one percent better on a weekly or monthly basis. 

Jeff Immelt, CEO of GE has made 1% better a mandate there. GE collects and analyzes data from various areas of operation to make mini improvements in efficiency. They use these updates to software, which can be sent to their equipment plants, to create 1% gains in performance. GE has a vision of boosting productivity in the US by 1.5% annually. If they’re successful over a 20-year period, they could raise the average national income of GE by 30%.

So you may want to make some 1% better changes in your business, but where do you start? Here are 4 places to start looking.

  • When’s the last time you had a price increase? Many of us are afraid to raise prices because we fear losing business to the competition. The reality is that our clients see the value in our products and services. If you provide a product or service for $1,000, a 1% price increase is only $10. Your clients probably won’t even see the change.
  • Can you increase volume or sell more? Tell your sales team to sell 1% more. If your revenue was $500,000 last month, a 1% increase is only $5000 more for the month. Annualized, though, that’s $60,000 per year.
  • Can you buy better? If you manufacture or distribute a product, a 1% reduction in your cost of goods sold (labor and/or materials) can make a huge difference in your gross profit margin.
  • Can you cut overhead by 1%? Let’s face it when times are good, many of us don’t really look hard at some of the fat in our overhead structure. When we grow, we usually don’t look at how the investments we make in operating expenses are giving us the revenue or profit returns we expect. It usually takes a slowdown in business for us to begin taking a look at this.  

So here’s an example of the cumulative effect of those 1% changes you might make.


Revenue         $5,000,000                1% more/less          cumulative effect                                                       price increase            $50,000                  $50,000    

                      Volume increase        $50,000                   $50,000

COGS               $3,000,000

                        Decrease               -$30,000                    $30,000

Gross profit    $2,000,000


Expenses        $1,750,000

                       Decrease                    -$17,500                $17,500

Pre tax profit $250,000       adjusted pre tax profit         $397,500


The cumulative effect of all these changes has the potential of increasing pre tax profit by almost 60%. 

Now, let’s get real, it’s probably not feasible to implement all these changes at once. But you pick the ones you want to start with and figure out how to execute on them. Price and volume increases have the greatest impact, so that might be a good place to start. 

Being 1% better can have a huge impact on your business. The small changes you make in your business and in life can have a huge impact.

Topics: entrepreneurship, small business, strategic planning, cash flow, finance, profitability coaching, business owners, cash flow planning, growth, profitability, activity, execution, process

4 Processes that Affect Your Bottom Line- The Billing/Collecting Process

Posted by Bill McDermott on Mon, Aug 8, 2016 @ 11:08 AM

We’re concluding a 4 part series on processes that affect your bottom line. We started with your sales process and then moved on to the production and delivery process. Today, we’ll be discussing your payment process. The goal here will be to look at ways to shorten cycle times, eliminate mistakes through improved processes and/or change your business model if you see a way to do things more efficiently.

Most clients bill at least monthly, but I have a client who decided last year to implement weekly billing to shorten cycle times. The effect of weekly billing reduced their carrying level of accounts receivable, which freed up cash to pay down their line of credit and reduced interest expense. The impact on their business was significant.

There are many ways to improve your billing and payment process. Here are 5 for you to consider.

  • Make sure the payment amount and due date stand out. Your client must be able to scan the invoice quickly and see the amount due and when it’s due at a glance.
  • Double check your invoices. In order to avoid mistakes and delay payments, proof your invoices for typos, errors and computational mistakes.   Many times invoices are not paid due to errors you didn’t catch and is a drain on time and resources.
  • Invoices must be sent to the right person and that isn’t necessarily the project’s point person. Once your order/contract is signed ask for the name and contact person’s details of the Accounts Payables person. This information should be verified annually to insure that person hasn’t been assigned to another area or has left the company.
  • Encourage early payment. An early payment discount can help speedup payment. However, the discount should be highly visible and easily understandable. Many businesses offer 2% discount for payment in 10 days, often called 2% 10/net 30. However, you may want to remove any ambiguity by disclosing the amount of the discount and the cut off day to claim the discount.
  • Timing is everything. Invoices should be sent out as per the contract schedule or immediately upon completion of the project. There should be no delays. Timely invoices drive timely payments.

Following these 5 things will drive improved collections with better cash flow, which will either increase your cash balance or reduce interest expense on your line of credit.

Topics: entrepreneurship, small business, strategic planning, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, activity, execution, strategy, process, AR, invoices

4 Processes That Affect Your Bottom Line- The Delivery Process

Posted by Bill McDermott on Tue, Aug 2, 2016 @ 10:08 AM

So far we covered how to improve your sales process and your production process. This week we’re going to talk about how to improve your delivery process.

Whether you deliver your product to your client’s place of business or to your client’s home, your delivery service is a valuable convenience to your clients and it’s important to do it right. Botched deliveries can reflect poorly on your business and can cost you clients.

Recently, we’ve looked at how we improve cycle times, eliminate mistakes or improve the business model. To improve your delivery process, all of these need to be addressed.

-Implement systems for delivery. Don’t leave your delivery service to chance or assume that your employees will do it right on their own. Create checklists your employees can use to make sure everything is done correctly. If there is any hand offs from department to another pay special attention that those are done smoothly.

-If you have your own delivery fleet, GPS tracking is a good way to optimize your fleet’s performance. This can also help you cut fuel costs and optimize delivery routes for improved performance. Be alert to outsource where appropriate. If you find that other service providers can handle your delivery schedule with higher efficiency at a reduced cost, be open to considering that option 

-Communicate, communicate, communicate. Emails or texts to keep customers informed of their order’s delivery status or when their order has processed, shipped and estimated time of delivery. It’s important to inspect what you expect here and make sure the items was received and the client is happy with the purchase and delivery. This is also a way to head off potential problems.

-Train your drivers in customer service. Often your driver and your vehicle are the front line of your business. It’s important for them to be professional and clearly identified.

From your customer’s point of view, your delivery service is vitally important. It may be the only direct contact they have with your business. With any or all of these ideas implemented, you are well on your way to building customer loyalty and repeat business that improves your bottom line.

Topics: entrepreneurship, small business, strategic planning, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, execution, strategy, process, delivery process

4 Processes that Affect Your Bottom line- The Production Process

Posted by Bill McDermott on Wed, Jul 27, 2016 @ 10:07 AM

Have you noticed the number of houses going up in certain parts of your area? Residential building is alive and well and the number of houses going up in my area continues to climb.

If you’re a homebuilder, there’s a lot to do to build a house. It starts with buying a lot, then you have to grade the lot, then you pour the foundation. After that, you go vertical with first the framing, then the sheetrock, trim, windows and doors and finally the flooring, paint and appliances. Before you know it, the house is built, but maybe 90-120 days has passed.

You know the old saying, “Good, Cheap, Fast, pick any two?” The best ways to affect your bottom line with your production process is to focus on cycle times and eliminating mistakes. Whether you’re building houses or manufacturing a product, these two areas will impact your profitability.

What if the homebuilder wanted to shorten the cycle time it takes to build a house by 10% from 90 days to 81 days?

Let’s pretend he had 5 crews that each could build 4 houses a year or 20 houses. If he could shorten his cycle time by 10% if everything else is equal that means he builds 2 more houses per year. If his average profit per home is $20,000 that means his bottom line increases by $40,000 due to improving his cycle time. If he could shorten his cycle by 20%, it would double the profit increase.

There are some traps when you shorten cycle times. You can’t add labor to do it because that eats up your profit. The existing crew has to go faster. To do that you have to look at the areas that eat up a large portion of the time and go after those first. When you go faster, safety and quality can come in to play.

The other way to improve your production process is to eliminate mistakes. Let’s agree nobody’s perfect. We all make mistakes, but mistakes consistently interfering with your production process can eat in to your process and actually lengthen cycle times. If you don’t do it right the first time, you certainly don’t have time to go back and fix it.

Let’s pretend I’m the rookie framer and it’s my first day framing a house as part of the construction crew. The supervisor shows me what I need to do and is in a hurry to get me started (he might be trying to shorten his cycle times). However, on the second or third board, I pick up the wrong dimension of wood and after half a day, the supervisor comes back only to find out that I’ve used the wrong board and others have built on and around what I’ve built. Well, the crew then not only has to tear out what I did, but what they did also.

The mistake compounds and pretty soon the entire day was lost, maybe 2 because we had to tear out the mistake and rebuild it correctly. If similar or other mistakes were made by other crews then the builder is looking at a loss of maybe 10 days or more which will eat in to his profit margin. If the builder makes $5,000 per day (annual net profit/360) and has lost 10 days in cycle times then he has to deal with $50,000 worth of mistakes over the course of the year.

The key to improving the bottom line with your production process is through use of technology, job site efficiency and more effective interfacing of people, materials, equipment and information. In addition, establishing a scorecard that measures the performance against the goals of the organization. Effective performance measurement can drive efficiency, which can dramatically improve profitability.

Topics: entrepreneurship, small business, profitability coaching, business owners, cash flow planning, growth, profitability, people, strategy, process

4 Processes that Affect your Bottom LIne- The Sales Process

Posted by Bill McDermott on Thu, Jul 21, 2016 @ 10:07 AM

We’re starting a four-part series today, on the four processes that affect your bottom line. They are The Sales Process, The Production Process, The Delivery Process and The Billing and Payment Process.

Today, we’ll talk about your Sales Process.   One of the questions I get asked often is how can I improve my profitability? Everybody wants more, but it’s difficult to obtain because you have to change profitability by changing the variables that drive it.

Let me tell you what I mean. There are some very distinct variables that drive the profitability of your business and I’m going to talk about them in the form of equations.


Leads x Conversion Rate = Customers

If you want to increase your profitability, you can focus on simply getting more leads or increasing your conversion rate.

Example 1: If I increase my leads from 200 to 250 and my conversion rate is 33%, I’ll get 16.5 more new clients if I can maintain conversion rate.

Example 2: Maybe I want to improve my conversion from 33% to 40% on the existing 200 leads I have. If I’m successful, I’ll have 14 more clients because I’m converting more efficiently.


Number of Transactions x Average $ Sale = Revenue

If you want to increase your bottom line, you may want to increase the number of transactions (sales volume) or increase your average $ sale. 

Example 1: If I increase my number of transactions by 20% from 200 to 240 and my average sale if $15,000, then my volume will go up by $600,000 just due to higher activity. 

Example 2: Another way is if I’m happy with doing 200 transactions, but I really want to try to increase my average sale from $15,000 to $30,000, I don’t have to increase my volume, I just go after larger orders and still hit the $600,000 increase.


Revenue x Margin = Profit

You have two margins in your business: your gross profit (before operating expenses) and net profit (after operating expenses).

Example 1: If you want to increase your gross profit margin, you either increase prices or decrease cost of goods (labor and/or materials).

Example 2: If you want to increase your net profit margin, then you have to look at overhead and other operating expenses for places to cut. Sometimes when things are going well, we don’t look as hard as we should for places to cut.


So, where do you start? That’s the fun part. You get to pick! 

  • You can work with your sales people on how to find more leads or improving their conversion rate.
  • You can work with them either on increasing the number of transactions they do in a year or the average dollar sale of each transaction. Doing more volume or going after bigger fish are both good strategies.
  • You can work with your sales people on implementing price increases equal to the perceived value you create in the marketplace.

When you’re making changes in your sales process, I would encourage you to focus on one of these and track your results. Make sure you keep a compelling scorecard that measures the desired change you’re looking to accomplish. That way your sales people know if they’re winning or losing.

When you find the right recipe, using these ingredients, you’re well on your way to impacting your bottom line.




Topics: entrepreneurship, small business, strategic planning, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, strategy, process

Watch out for These 3 Liquidity Traps in Your Business

Posted by Bill McDermott on Fri, May 27, 2016 @ 13:05 PM

You might be in a growth phase of your business. Growth always requires cash and cash is generally at a premium. Further, there are some traps to be avoided as you grow. Here’s 3 to watch out for. 


1) Excess build up of accounts receivable

It’s normal for your receivables to increase when you grow. However, if you’re not careful, the build up can be excessive if you also experience a slow down in payment from your clients. For every $1 million in revenue, 1 day’s worth of AR is about $2,800. If you’re a $10 million company and you have a slow down of 10 days in your collection period on AR, that’s $280,000 that is sitting in AR that could be sitting in cash. Wouldn’t you rather have all or a substantial amount of that in cash?

To monitor this, calculate your accounts receivable turn. Take annual revenue/AR balance to come up with your receivables turn. To calculate the turn in days, take 360/AR turn). For example, $1 million/$200,000 AR balance is 5x turn. 360/5 =72 days sales in AR.


2) Excess build up of inventory

You can experience the same trap with inventory, or potentially double if you sell the inventory on credit terms and it converts to AR when sold.

To monitor your carrying level of inventory, calculate your inventory by taking your cost of goods sold/inventory balance. To convert it to days take 360/inventory turn.

So, if your cost of goods sold is $8 million and your inventory is $1 million, your inventory turn is 8x. To convert this to days take 360/8 and your have 45 days worth of cost of goods sold inventory.


3) Purchase fixed assets and with cash

You might be a person that likes to pay cash and not borrow money. I get that. But one of the traps that growth company’s experience is not having sufficient cash to meet payroll when that cash has been spent on fixed assets. Generally, you want to match your long term uses of funds (like buying furniture and equipment) with long term sources of funds like loans. You keep your short term sources of funds like cash to handle short term uses like operating expenses, receivables or inventory.

Many business owners have a line of credit for equipment purchases that they fund up throughout the year and then convert it to a term loan. That’s a good way to avoid spending your cash but still making the purchases. 

Growing your business is hard enough all by itself. Don’t fall in to these liquidity traps that make it even harder. Stay connected to your balance sheet and monitor your trends in the financials so you don’t get caught short of cash.

If you’d like more information about profitability coaching tips like this, please contact us and we’ll be happy to set up a time to talk in more detail.

Topics: small business, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, activity, liquidity

What would Rockefeller Do? 7 Tips to Run Your Business Like A Billionaire

Posted by Bill McDermott on Fri, Apr 22, 2016 @ 09:04 AM

John D. Rockefeller was a famous industrialist and philanthropist. He founded Standard Oil Company and became the world’s richest man controlling 90% of all in the US at its peak. His fortune at his death was $23 billion in today’s dollars. He was also well known for his generosity and donated over $500 million to charities with medical and educational focus throughout his lifetime.


So, how did he do it? For any of us who are thinking about growing our businesses, why not consider one of the most successful Americans in history?   Here are some of the main points of his success:

  1. Too many business owners are busy working “in” the business instead of working “on” the business. It’s important to develop priorities, analyze your success of those priorities in your financials and establish a monthly meeting rhythm to cover your progress towards success.
  2. There should be one critical number that everyone in the company should be focused on to move the company forward. Profit, revenue and cash are all examples.
  3. It’s important to have the right people, doing the right things and doing them right to be effective and efficient. The organization should have a person accountable for every facet of the organization: sales, operations, finance, IT, R&D etc. It’s important that each of these areas have a critical number in their particular area to focus on as well as the one critical number overall.
  4. When you encounter obstacles or roadblocks in your organization, it’s important for the owner to solicit client and employee feedback to accurately assess the issue and resolve it.
  5. It’s important for everyone in the organization to understand what you do and why you do it. Core values and purpose should be alive in every organization.
  6. It’s important to keep score on your success with key performance indicators (KPI’s) so everyone knows if you’re winning or losing on a weekly or monthly basis.
  7. If you’re hitting or not hitting your KPI’s it’s important to understand why. Success or failure is usually a function of the following issues:
  • People
  • Process
  • Strategy
  • Execution

When you can successfully adopt these Rockefeller habits, you are well on your way to building an empire of your own like he did! $23 billion anyone? If you’d like some help getting started contact us for more information.

Topics: balance sheet, debt, entrepreneurship, small business, strategic planning, cash flow, finance, profitability coaching, income statement, business owners, leadership, cash flow planning, growth, profitability, profit & loss statement, execution, people, strategy, process

Eliminating Mistakes: Can My Business Be More Efficient?

Posted by Bill McDermott on Thu, Apr 7, 2016 @ 10:04 AM

Last week we did a deeper dive in to Shortening Cycle Times. This week we’re going to talk about how to eliminate mistakes. No matter what type of business you’re in, we’ve all made mistakes in our sales cycle, production/delivery cycle or billing/payment cycle. As we try to shorten cycle times, that means we’re going faster. Often mistakes occur when that happens. Your sales person quotes the wrong price or doesn’t have updated costs in his quote. Your production people miss the specifications of the client’s product and you’ve created waste. You bill the client for the product but don’t include shipping or freight. All these things have a negative impact on profitability. So, how do we eliminate mistakes?

When things are going good, like when the economy is expanding, there’s lots of business out there and there’s not a lot of pricing pressure or competition, your profit margin typically covers a lot of these inefficiencies.

However, when the economy slows down, everything changes. Customers cut back on spending and you can’t increase prices, or you may even have to lower them. How do you save money?

It’s important to pinpoint the causes or errors. Mistakes are not a sign of incompetence.   Mistakes usually occur because something is wrong with your process. The best way to discover these reasons is to ask the people who do the work. Some questions might be:

  • Are there any physical obstacles contributing to errors?
  • Are co-workers rewarded for quantity or quality?
  • Do co-workers have to interpret anything?

Once you’ve asked your people for input, how do you implement process changes to eliminate mistakes. Some solutions may require significant investment, either people, time or money. However, some may not. So, how do you pick?

My suggestion would be to consider the following:

  • Select solutions that have virtually no cost. If you can fix mistakes for $100 or less, that’s a great deal for you.
  • No new staff, many people will select a solution that requires you to hire staff. I’m not saying that’s a bad idea, but the long-term cost to hire a person is substantial. Plus, there’s no guarantee this person can pay for themselves long term.
  • Choose solutions you can implement in 30-60 days. Try hard not to take on a long-term fix that could end up taking months or even years. Company priorities often change quickly and that could easily downgrade the long term fix you’ve implemented.

Eliminating mistakes can be difficult to tackle, but hopefully these ideas will help you run your business more efficiently in the future. How do you eliminate mistakes in your business?

Topics: entrepreneurship, small business, cash flow, profitability coaching, business owners, growth, profitability, activity, execution, process