Beyond the bottom line
Have you been to a movie lately? After you buy your large tub of buttered popcorn, your tray of pretzels, cheese dip and Diet Coke (you wouldn’t want regular Coke with all its calories), the ponytailed 16-year-old behind the counter asks if you want a receipt. After you fill your tank, the pump asks: “Receipt? Yes or No.” Ditto for your ATM.
Someone, somewhere has wondered, “How much do we spend on these rolls of receipt tape?”
The point is no expense is too small to measure. There is an old adage that says, “You get what you measure.” It may be a cliché, but at its core it is quite profound. “What should you measure?” you ask. Answer: Everything.
Most business people start with the profit and loss statement and too many people end there, neglecting completely, or at best, minimizing their scrutiny of their balance sheet. It should be the other way around. Your balance sheet is where your net worth resides.
The most basic balance sheet metric is the current ratio — current assets divided by current liabilities. It should calculate to at least 2-to-1. Receivable days outstanding and inventory turns are the most common assets measured. While the total days outstanding are important metrics, they should also be measured on a customer-by-customer basis. Keep track of what percentage of your sales and receivables are with your largest customer. Your personal risk tolerance will determine what this figure should be. More than 5% should start you thinking. Consider incentiv-izing your collection department based on reducing the amount and percentage of past-due accounts.
Inventory turns in the aggregate should only be the starting point. A truer measure of your purchasing effectiveness is turns by product or at least by product group. Base your purchasing peoples’ bonuses on inventory turns offset by the number of stock-outs.
Your mix of business will determine receivable days outstanding and inventory turns. The extent to which you have to dip into your bank line is a good gauge of how you are managing these assets.
Speaking of bank lines, be sure to pay close attention to any covenants. One that is pretty standard is the ratio of total liabilities to net worth. Liabilities should be less than net worth. Otherwise your bank and other creditors have more claim on your business than you do.
So far we’ve only discussed the balance sheet. Now let’s turn our attention to your P&L statement. Sure, everyone keeps track of sales, gross profit margins, operating expenses and pre-tax net. But what do you measure them against? How about the 30-20-10 rule? Thirty percent gross profit margin, 20% operating expenses and 10% pre-tax net, with about half the operating expenses being wages and salaries. “Ten percent net is a stretch,” you say? You’re right, but it is being done by a number of well-run yards. To achieve this, you need to set specific goals for every aspect of your business, then measure your performance. Remember, you get what you measure.
Have you ever “fired” a customer because you couldn’t make any money? How did you measure that? The obvious first metric is gross profit margin and dollars. Then analyze gross profit margin and dollars per delivery, using your picking ticket or shipping manifest. Then deduct your delivery costs. You need to know the cost per mile for each of your vehicles — fuel, maintenance, depreciation, interest on the cost of the truck, and finally driver wages and benefits. How far is the job site? Then deduct the “nuisance costs.” How much of your staffs’ time does he take up? How often does he ask you to pick up material that he over-bought? Does he pay on time? Only after you measured all these factors can you make an intelligent decision about “firing” this customer. Before you fire him, you might talk with him about the relationship, armed with these facts. He may even change his habits and become a profitable customer.
How do you improve your gross profit margin? By relentless scrutiny of every product category, then drilling down to every SKU. If you belong to a buying group — and everyone should — add the service fee to the invoice cost, plus 1% for shrinkage and mark up from that. Put the rebate in a separate account that has no bearing on setting selling prices. Another technique is to buy full truckloads, then set your cost for pricing purposes as though you bought from distribution.
Cost of goods sold is your largest expense. Next is payroll. Earlier you saw that wages and salaries should be in the range of 10% to 12% of sales. A basic metric for payroll is $400,000 to $450,000 in sales per full-time equivalent employee.
Below these are a whole host of other expenses.
Set new goals periodically.
And remember: You get what you measure.
Tony DeCarlo has more than 35 years experience in the building materials industry, first as CFO then CEO of Lumbermens Merchandising Corporation (LMC), from which he retired at the end of 2009. For the last three-plus years, he has been president of DeCarlo Advisory Services. DeCarlo sits on several industry-related boards and is associated with Anchor Peabody, a financial services firm providing advice to dealers regarding financing and M&A activity. He can be reached at [email protected] or (610) 408-8685.
You need to set specific goals for every aspect of your business, then measure your performance. Remember, you get what you measure.
Flush with good deeds
What does a humanitarian mission in Bangladesh have to do with the growth of an iconic American brand, or a new color scheme for American Standard?
Actually, a lot. And the connection between the three — and several other initiatives at Piscataway, N.J.-based American Standard Brands — revolves around relatively new CEO Jay Gould.
What’s happening in Bangladesh is basic human improvement. “When I joined the company, I was shocked to learn that 2,000 kids die every day for lack of access to proper sanitation,” said Gould, who took over as CEO in January 2012, replacing Don Devine.
Under Gould, the company flexed its humanitarian muscle when the Bill & Melinda Gates Foundation solicited ideas to develop innovative sanitation solutions in the Third World. During all of 2013, for every Champion toilet sold, the company donated a sanitary toilet pan for distribution in Southeast Asia. (Gould himself toured Bangladesh on a follow-up mission in 2013.)
For Gould, a self-confessed believer in “purpose-driven companies,” the effort that became “Flush for Good” was more than cause marketing. It was an event to boost morale at American Standard, following successive cuts and restructurings. The company had seen about three years of twice-a-year restructuring or downsizing.
“Frankly, [employees] were tired and beaten,” Gould said. “Survival is not a stirring reason to get out of bed.”
American Standard employees who talked to HCN confirmed the new-and-improved culture. And there’s also a new-and-improved strategy at work. To wit: The company is working to flush its low-cost-provider reputation.
In talking to major customers, the same three desires appeared on the top of the list: brand building, demand creation and product innovation. “They were all asking for the same thing, and it wasn’t ‘What’s your lowest price?’ ”
The company’s new look is playing a role also: updated, refreshed and described as slightly more feminine than previously — a marigold, teal and charcoal color scheme that was selected for its “bold and optimistic” message. (It’s also more distinctive within the industry than the classic red, white and blue, Gould said.)
A two-month-old deal with Ferguson, the nation’s largest kitchen and bath showroom company, is an important step for American Standard, which can help it begin to compete on a “level playing field” in a high-quality showroom environment, he said.
With a five-year plan firmly in place, the company is on pace for core revenue to increase 9% to 10% in 2013, with double-digit increases in 2014.
Behind the scenes, the company’s supply chain was revamped, leading to improvement in gross margins from 15%, when Gould became CEO, to its 22% level currently.
For Gould, the idea of doing good around the world goes hand in hand with business success. “I’ve actually been amazed by the response to Flush for Good,” he said. “It’s bringing humanity back to the category.”
Toolmakers build support on Kickstarter
If you were hoping to launch your quick-drying spackle on Kickstarter last fall, you may have been out of luck. Or at least that’s how the story at Lockitron goes: In October 2012, co-founders Cameron Robertson and Paul Gerhardt took to TechCrunch to explain how their smartphone-enabled deadbolt was rejected by the crowdfunding platform for falling under the prohibited category of home improvement.
To be sure, it’s not entirely clear whether this was a categorical ban or an isolated case. According to Kickstarter’s Justin Kazmark, there was never an outright injunction on home improvement, but the company did introduce new guidelines for hard-lines and industrial design projects around the same time that Lockitron submitted its bid. Makers and builders who fall within this purview are now required to show their work: no product simulations, no product renderings, and no “pre-ordering” via multi-quantity pledges on what’s essentially an unfinished product.
Though Kazmark acknowledges that the company’s guidelines have evolved over time, it’s possible that a couple projects were held to different standards, or that someone on staff misrepresented the rules, he said.
In either case, here’s where we stand one year later: Lockitron raised $2.2 million (nearly 15 times its original goal) via pre-orders on its own website; a new upstart called Christie Street was launched to answer the call for a hardware-friendly crowdfunding platform; a number of home improvement products have, after all, had success on Kickstarter.
For some products, this may be what it takes to get ahead in the post-recession marketplace, but not for the reasons you’d expect. Rather than established, cash-strapped companies trying to gin up their liquidity, it seems that new brands are launching concurrently with their Kickstarter campaigns, and money isn’t even the biggest motivation. What these start-ups are seeking is feedback on product demand — before the fact.
Take LIFX, for example. The WiFi-and smartphone-enabled light bulb with its full spectrum of color settings saw wild success on Kickstarter (more than $1.3 million pledged of its $100,000 goal), but even the makers behind it didn’t anticipate the level of demand it would see. Having put the product on everyone’s radar, the company has been busy scaling its business accordingly and getting ready to ship to international retail stores.
“Kickstarter was more for idea validation than a capital banking exercise,” said Simon Walker, head of global marketing at LIFX. “It has the added bonus of allowing people to pre-purchase and to [amass] a large amount of customers before you ever go to product, which is a great advantage.”
Outlaw Fasteners, which aims to solve several pain points associated with deck screws via an innovative product design, tells a similar story: The point of its campaign was to “begin at the grassroots level with a demand for the product before any kind of retail strategy is put together,” said marketing director Ron Elmore.
When considered from this perspective, Kickstarter begins to seem much more hospitable to those outside the traditional tech community — say, the minds behind a fastener company — who are trying to thrive in an increasingly digital age.
“We knew that if any demographic would find validity in the concept, it would be the Kickstarter community” and its host of early adopters, Walker said. “There’s actually a huge opportunity [for home improvement]. Connected home is an exploding industry right now.”
Both Outlaw Fasteners and Bosse Tools, the maker of an ergonomic shovel, exceeded their funding goals.
Elmore stressed that it wasn’t enough to build a good Kickstarter campaign, though the quality of presentation is what makes or breaks these kinds of efforts. Outlaw hired social media pros to launch a PR campaign in tandem with the Kickstarter campaign.
Beyond reaching the correct audience, it was the demonstration of the actual use of the product that proved especially challenging.
“We assume [the video] is being watched by a knowledgeable user of home improvement,” he said. “We wanted to test the viability of the product in the hands of the person who’s operating the drill, so our content had to show people using it and clearly explaining its benefits, whether you’re a professional in the industry or if you’re just putting up curtain rods. The campaign couldn’t leave anything unanswered. [Questions like] ‘How did you coat the screws?’ would be asked by a pro.”
At the end of the day, the components of a successful crowdfunding campaign ring true for all market segments: high-quality video content, branding, packaging and product display, as well as a certain amount of restraint.
“There’s no magic,” Walker said. “It comes down to having an engaging product that people see value in and that they ultimately want. The whole idea was [it being] something the market hadn’t seen before.”
Deck screws with a grudge against stripping, wobbling and bit changes
Raised: $109,926 of $100,000 goal
Story behind the story: It won Pro Tool Review’s “Innovative Product of the Year Award” while it was still in its fundraising phase.
Where are they now? Getting ready to fill all those freshly minted orders.
The 16-million-hued, everlasting light bulb you control with your smartphone
Raised: $1,314,542 of $100,000 goal
Story behind the story: The campaign raised $1.3 million in just six days — more than 13 times that of its original goal.
Where are they now? Proliferating their wares internationally.
The futuristic shovel your back will thank you for
Raised: $64,142 of $60,000 goal
Story behind the story: The 24-year-old founder won several entrepreneurship competitions in college before deciding to launch Bosse Tools upon graduation.
Where are they now? Gearing up for production, whilst scheming about future ergonomic tool innovation.
The world’s only multi-function hammer with a built-in crowbar
Raised: $135,250 of $100,000 goal
Story behind the story: The Cole-Bar Hammer was a joint vision shared by Indianapolis inventor Lance Hyde and his 11-year-old son Cole, who died in an accident months after conceiving the idea. Cole-Bar is the first hand tool ever to be successfully launched on Kickstarter.
Where are they now? Taking pre-orders online
The never-panic-over-your-front-door-again app
Raised: $2,278,891 of $150,000 goal
Story behind the story: Was only surpassed this July as the most successful self-funding campaign (ever).
Where are they now? Taking on additional pre-orders in the midst of its official launch.