Get out your financial statements, for here are the latest numbers: 6.06, 19.82, 23.78, 41.65, and 59.61.
No, this isn't the lottery; it's benchmarking, the practice of measuring the performance of your business against others in your industry. Those numbers are a few of the key financial ratios reported and calculated in the latest Cost of Doing Business (CODB), prepared by Jim Enter of the American Association of Roundtables (AART) for the National Lumber and Building Materials Dealer's Association LBM Institute.
Specifically, the ratios above represent pretax profit (6.06% among the 124 LBM dealers reporting their 2006 results), pretax return on assets (19.82%), total operating expenses (23.78%), average accounts receivable collection (41.65 days), and personal productivity (59.61%). If your numbers match, your business is smack dab in the middle of the dealer link of the supply chain.
However, the fact only 124 dealers responded to the CODB survey last year is a possible sign that relatively few in the industry care to or can benchmark well enough to participate. NLBMDA and a coalition of regional associations are sponsoring surveys this year.
"Sadly, most dealers have never heard" of the CODB, says Mike Butts, president of LBM Solutions, an industry consultant in DeWitt, Mich., and a columnist for ProSales. "Often, benchmarking is an intimidating concept, and they're just trying to keep the doors open."
Butts and other experts, as well as dealers who formally benchmark, say that benchmarking isn't just about comparing financial performance. While tracking key money metrics provides a road map to better performance, both financially and operationally, any sort of comparative analysis–of store signage and merchandising, delivery fleet, even employee dress code–can be considered benchmarking.
"Any analysis of your processes, policies, and people, especially in depth, is an essential business practice," says Enter, president of the AART in Murrells Inlet, S.C. "You need to know why you are where you are."
Key Metrics. Financial performance is the most obvious and overt benchmarking tool. Most of the numbers exist in a typical dealer's profit and loss, cash flow, accounting, and other statements and simply need to be calculated, usually within a standard spreadsheet program, to arrive at the ratios in the CODB report or that you think are most relevant to your operation.
Among 31 financial measures the CODB contains, the "starter set" of key metrics includes:
- Gross sales volume (a number, not a ratio)
- Cost of goods sold against net sales
- Inventory turns (the costs of good sold against your average inventory)
- Accounts receivable collection days (an average, not a ratio)
- Personal productivity (your payroll expenses as a percent of gross profits earned).
Perhaps the most telling indicator, however, is the ratio of earnings before tax return on assets, or EBTROA, which measures the pretax, pre-interest earnings from your operations as a percentage of your total assets. "It takes everything into consideration," says Enter, accounting for key variables that can influence gross revenue or manipulated to change those earnings before taxes.
In today's economy, Enter says, the EBTROA ratio is hovering at 20% among all dealers, including those focused on retail and DIY business. Among contractor-oriented dealers, however, it spikes to nearly 33%.
"If your EBTROA doesn't measure up, you need to start looking at your expenses, if you have too many assets or your margins are too low," among other variables measured by the ratio, he says. "Then decide which of those areas is giving you the biggest problem and set a strategy to fix it."
Not Just Numbers. If financial ratios make your eyelids heavy, rest assured they aren't the only way to benchmark your business. Joost Douwes, vice president and general manager of Chinook Lumber, a five-location, $26 million, mixed dealer based in Monroe, Wash., northeast of Seattle, carefully analyzes his financial performance, in part to adequately prepare for and participate in one of Enter's semi-annual roundtables among noncompetitive business peers.
But Douwes also looks forward to comparing Chinook Lumber's performance outside of those ratios, discussing and sharing best operational practices with the dealers around the table.
"We're benchmarking all the time by paying attention to what's going on around us," he says, and he thinks most dealers do the same to some extent. "If you tell me you don't benchmark, let's redefine the term."
A broader interpretation, he and others say, includes an ongoing analysis of the local competition, a look at your business' strengths, weaknesses, opportunities, and threats, and a deep understanding of your customers.
"One of the most important issues facing independent dealers is knowing their businesses intimately enough to recognize problems before they arise," Butts says, all of which ultimately impact the bottom line.
Douwes even strays outside the LBM realm for ideas, comparing the merchandising in his locations to that of local supermarkets, for instance. "No one is better at that than the grocery business," he says. "We visit the ones we like periodically and talk to the managers."
Value Added. Before he started formally benchmarking his financial and operational performance against the CODB report and other comps, Bob Kaper Jr. relied on his gut. "I always felt like we did things right," says the co-owner and general manager of Kaper's Building Material, a single-location, $20 million dealer in DeMotte, Ind.
Then Kaper had an epiphany about leveraging performance as a sales tool. "If you are able to prove claims about on-time delivery or other services you offer, it distinguishes you from others making the same claims," he says, which can be a competitive advantage, especially during a construction lag. "Now, not only is our performance great, but it can't be disputed."
Formalizing a benchmarking practice also promoted a companywide culture of accountability and made it easier to sell the concept and collect accurate and timely data. "It raised the level of importance of everyone's role and value they bring to the company," he says.
On a more pragmatic note, benchmarking will also enable Kaper to best judge the performance of the company's new truss facility. "Six months from now, we'll know if it was a good decision or not," he jokes.
Sarcasm aside, Kaper's comment exposes the inherent problem with benchmarking and explains why it is but one tool among many for running an efficient lumber business. Kaper likens the practice to driving a car using the rearview mirror.
"Unfortunately, you can't change the past," Kaper says. "But if you have history, you can map your future more effectively. You can't manage what you can't measure."
–Rich Binsacca is a contributing editor to ProSales.
The 2007 Cost of Doing Business report (representing 2006 data) is available by calling 800.634.8645. The cost is $225 for NLBMDA members, $375 for nonmembers. The 2008 report is expected to arrive in mid-August. Meanwhile, a group of regional lumber and building material associations is sponsoring its own Cost of Doing Business Survey. Contact your region?s LBM group to see if it is taking part and for details.