DEBUNKING THE MYTH about BENCHMARKS7 Jul, 2010 By: Gary Halperin, FPL Reports imageSource
DEBUNKING THE MYTH about BENCHMARKS
Revisiting the Reporting Foundation
Sometimes when there is chaos and uncertainty surrounding us, it’s helpful to find a handhold to get stabilized and grounded; refocused on core activities that will help us navigate through these uncertain times. It’s often, however, that the most obvious things get overlooked, while they can shine a light on the best paths to take.
There are approximately 5,000 dealers of office equipment, supplies and service in the US market. Approximately half of that figure represents viable stand alone businesses that carry and represent the major manufacturers. Approximately 500 entities fall under the umbrella of a manufacturer as direct sales entities, including the former Global and IKON locations.
A remaining 2,000-plus can loosely be called the independent dealer channel. The variety and size of these companies vary greatly. For purposes of this discussion, dealers with annual revenues over $10 million are assumed to have enough size to afford an in-house accounting person that’s capable of producing meaningful financial data on a routine basis for management decision making. An aggressive estimate is that those sized dealers make up about 20% of the independents, meaning that there are about 1,600 dealers with annual revenues of less than $10 million. And that these companies most likely do not have a sophisticated financial leader inside their company.
In the late 80’s, Tom Johnson of Alco Standard created the foundation for routine financial reporting and benchmarks. Tom brought his methodology for measuring with him when he founded Global. Ten years later, as Alco dealer Presidents and CFO’s moved out of Alco/IKON, they brought the methodology to the independent dealer community via seminars, webinars and consulting. The larger companies and some of the smaller ones adopted the “Functional P&L” model; Key Performance Indicators and Benchmarks. The balance of the dealers, while understanding the need for the data, were either solely focused on the business at hand or didn’t have the resources to retain in-house sophisticated financial leadership.
Well envisioned financial statements and analytical reports are core to being able to successfully run any company. Without a good look into where your revenues are coming from, what activities generate adequate margins and what expense levels are to deliver those results, a company would be “flying blind.” What enabled the Alco and Global companies to perform so well and increase their top and bottom line was a solid set of reports that pointed them to activities that needed to be aggressively continued, and those that needed performance improvement. Both activities improved the bottom line year over year at record rates.
Why bring a business concept to the smaller independent dealer community if they don’t have the bandwidth or knowledge to adopt it? The answer is that they understand the need but are struggling with the cost/benefit ratio and therefore have been unwilling to allocate the resources to this endeavor. It’s akin to suggesting that a healthy diet and regular exercise are known to be very good for you, but how many of us routinely incorporate those activities into our daily regiment?
With the right information about their business, owners can make a handful of decisions that would earn a significant return, and then believe in the cost/benefit to spend the resources to have these figures.
A strong set of financial analytics is crucial to operating an office products dealership. The business is a four legged stool: equipment, supplies, service and administration. You cannot successfully operate these entities unless you know exactly what each functional area is contributing and costing. Success will then be dictated by the steady progress that the dealer makes in improving each area that he focuses on.
All of this is accomplished by having consistent reporting delivered to management on a timely basis so that they can continue focusing their energies on the operational areas. The original assumptions in the early part of this document stated that the average small dealer does not have the bandwidth or the proper resources to develop and deliver this reporting consistently, timely and accurately. If that is actually the case, rather than foregoing having the right tools to manage your business, the small dealer should be outsourcing this financial reporting function to an experienced individual that has the tools, knowledge and experience to support them each month.
Measuring Your Results / Functional P&L
Assuming that most of you are in business for financial gain, having a well envisioned chart of accounts that is the basis of producing meaningful results will serve you well. In a sense, most systems are best reverse engineered. Start with what you need to know to make solid decisions for running your business; what has to be measured and reported on a routine basis so you know what’s working and what needs improvement. Additionally, factor in the effort that you want your staff to put forth to retrieve this information on a timely basis.
For dealers in the office products industry, the Functional Profit & Loss Statement is the minimum that I would recommend. This captures revenues, cost of goods sold, gross margin, operating expenses and contribution by the major functional areas of the business: equipment sales, supply sales, service activities and administrative expenses.
An additional column can be added for MPS compensation. This is done specifically to not co-mingle the MPS compensation with any of the other direct operating expenses that it takes to deliver the other revenue silos. If these other silos aren’t contaminated by too many issues, we are left with a clean view of where our revenues are coming from and how much “sticks” and makes it to the bottom line.
The Good & Bad About Benchmarks
The Functional P&L is the first requirement for running a business with your “eyes wide open.” The second concept is to make sure that you have a well envisioned chart of accounts that would help with your GL configuration for mining data to populate the Functional P&L.
So now what do I do with the data once I have it?
Most dealers seem to get overly focused on what is considered good or get competitive if they are ranking their results with other peers. My answer to owners when asked about their performance is, “who are you trying to satisfy?” Do you want to meet your own financial goals or simply get an acknowledgement from a consultants that you have attained a particular figure?
Across the spectrum of dealers, all are at different stages of development and are faced with different market conditions. One company may be very young and has to establish themselves in the market place while another may be very tenured and is getting the majority of their business from their existing customer base. It would be of little value to compare these two companies as it would be of little value to compare them to standard benchmarks.
I subscribe to the theory that you have to have a plan of what you’re trying to accomplish and then measure yourself against that plan. Benchmarking should then follow. But the benchmarking should be against your own plan and growth. Are you improving the figures that you set out to improve? Did you have a plan or strategy by which to operate by to accomplish those goals?
I’m not suggesting that there is no value in the benchmarks. They show you what a model dealer looks like to achieve 15% bottom line; net operating income. Although I had a dealer raise his hand in a meeting and ask if 22% was good. What was I supposed to say? That you missed the mark by 40%? Therefore, it’s all relative to where you are in your journey.
In summary, some things do bear repeating like back-to-basics is always a good strategy as we navigate through uncertain times (a title for a future article). Properly envisioned reporting is key to identifying how you are proceeding on your path. Setting yourself up to have this on a routine basis is paramount both with a well-envisioned system and the proper professional to assist you. Lastly, your goals are exactly that; your goals. So, first set your benchmarks closer to home in what you are focusing on achieving. Later you can determine where you want to excel to reach higher performance levels.
Gary Halperin is a long time Office Products Industry financial leader having participated in the formation of the original Alco reporting package. He was CFO for IKON in Seattle, CFO of Print, Inc., and Senior Consultant for eAutomate. For information on financial reporting programs, business planning and tactical solutions for your dealership, visit www.FPLReports.com