Employee Productivity Ratios [Download PDF]
Most of you have experienced the largest year-over-year drop in sales in your company's history. That's according to the National Lumber and Building Material Dealer Association's 2008 Cost of Doing Business (CODB) Report, which reveals a dramatic change in 2007 from 2006.
The media reports concerning the state of our industry are extensive, so I will try to add as little fuel to the raging fire as possible.
Here are the facts: Sales at a typical dealer were down 39%, and pre-tax profit margin was down 62%. This sharp drop in profit margin is a direct result of gross margins falling 3 points, and other operating expenses climbing 2.1 points. Gross profit per employee dropped 33%, earnings before tax return on assets declined 69%, and the growth potential index (which measures a company's ability to grow business with internally generated cash) fell 64%.
Most dealers reacted quickly to the downturn by cutting their most obvious variable expense–payroll–by 2 percentage points. However, fixed expenses as a percentage of declining sales grew by the same amount. What most dealers must now decide is what's the next move. As always, it depends, particularly on whether sales are flat, off 20% or down 70%.
Critical ratios are sales per employee and gross profit per employee. From an operations standpoint, if you only watch two numbers in your business this year, watch these two. These ratios are more important than tracking overtime hours. Chart how sales per employee and gross profit per employee compare year-to-date of the previous year as well as same month last year. Certainly, there are several financial ratios you will need to watch as well.
As many companies go out of business during the first phase of recovery as go out during a recession. Running out of cash is the primary culprit. Losing money is not unpardonable, but running out of cash is. The growth potential index (GPI) dropped in 2007. When your market begins to recover, it is important to know your GPI. And if the opportunity for growth exceeds this number, you have only two choices: Get your banker on board early, or don't outgrow your GPI.
To learn more about these and many other ratios, contact member services coordinator Paul Corsi at firstname.lastname@example.org about a copy of the CODB survey results.
–Jim Enter is founder of the American Association of Roundtables. He compiled the 2008 Cost of Doing Business Report for NLBMDA.