Planning by the Numbers Won’t Work in ’09

Metrics help you analyze your business, set goals and benchmark yourself against others. Many like to consider industry benchmarks to determine their “success”. When you look at your 2008 information, beware. While your numbers may mirror the industry (and why seek to imitate vs. excel?), they trend, multi-year, that they show may hide the challenges and opportunities that your business may face. Planning from metrics requires looking at the right metrics, or ratios, with a jaundiced eye and a penetrating understanding of the business.

Why? Because 2008 was not your normal year!

As you plan for next year…. most of us start by looking at our history as it concerns “last year’s (2008) sales, sales per employee, gross Margins/ employee, net profit and more. Guess what? You might want to divide your 2008 year in half before you make any judgments as well as consider, “is the past a precursor of the future?”

In Electrical Wholesaling magazine’s November issue, which shared information regarding distributor product mix, noted that most full line electrical distributors sold about 14.7% of their product mix in wire and cable. This was a 2.5% increase from 2007. And remember, this is an average based upon self-reporting.

Most electrical distributors started the year 2008 aware that copper was at $3.0505 and the market was strong. Some distributors made a conscious effort to stock up on various sizes of copper wire. By July 21st 2008 copper had risen to $3.710 and many distributors felt that they had guessed/bet right. All of their ratios that they use to measure their performance were humming along.

By the end of 2008 copper had fallen to $1.47247 (Dec 9, 3:35PM EST). Distributors who loaded up were having selling at the current market level. Which, in most cases, means that their margins will be in the tank/ditch until $3.710 copper wire is out of their inventory. (in reality, most distributors have exhausted their “over-priced” wire, but you understand what we mean … distributors have been losing money as the price of copper has imploded.

To really measure your company’s performance and productivity in 2008, you should consider your metrics before July 21st and at the end of November/December. While many of you will see reduced margins on wire and reduced overall margins as well as reduced net profit for the last half of the year, the usual “one look at your metrics” will lead to false conclusions.

Which begs the questions, what are the types of metrics you should consider to better manage your business and how frequently should you be looking at them? What are the key metrics to measure profitability, sales productivity, operational productivity, financial performance, inventory management? Ideas we’ve seen work include:

• Product mix
• Line item / sales unit
• Project close ratios
• Project quotation indices
• GMROI
• Sales (gross margin) / employee and per revenue generating unit
• Turns
• Units sold
• Average order size and average by writer
• Excluding wire in ratios

What else have you found that works?