We had a new customer come to a group meeting and made a comment that they really liked the meeting but thought we would spend more time talking about bottom line profit percentage. I commented that we spent 2 days talking about nothing but making money. He accurately pointed out that we did not discuss the net profit percentage with any of the businesses during the review. It was then apparent that what we really had was a different focus on profit. He was looking at the net operating income (NOI) percentage which is a results number and we spent our time discussing the areas of opportunity that make up the journey that gets you to the NOI. In other words, the driver numbers.
Our industry is full of numbers. Everywhere we turn there is a number to look at or measure. We have industry experts that serve as our consultants and we use our peers as experts also. Every time we talk to them they say something that makes us want to look at a number and see if we can improve it. We can easily get lost in the numbers and end up with paralysis by analysis. What can be even worse is that we start to chase the wrong numbers.
You can take every number in your business and divide it into one of two categories. They are either a results number or a driver number.
A results number is a by-product of something else. An example of a results number is net operating income or the bottom line profit number. It is the whole reason why we are in business and so we focus on it but it is truthfully the end result of the amount of gross profit we generated and expenses containment. We cannot say that we are going to make more money without addressing those two areas to make it happen. The gross profit and operating expenses are examples of driver numbers.
You want to concentrate your efforts on working / improving your driver numbers and not chasing your results numbers. Keeping with the profit example, our goal will be to increase the net profit of the company. The two primary driver numbers are gross margin and expenses. Gross margin improvement can be done in a number of areas. Each product line that we sell produces gross profit or gross loss. We can purchase vehicles that produce better gross margin (the difference between sales & cost), purchase & process more vehicles, grow warranty sales, sell more brokered parts while increasing the average profit per part & reducing the gap on freight collected versus freight bills paid are all driver numbers that will impact the bottom line. Positive results will have a positive impact while margin erosion will have a negative impact.
The other side of the profit equation is expenses. Overhead creep is something that happens to a lot of businesses. It is a proven fact that in normal cases, you cannot cut expenses as fast as revenues get cut. Having a great understanding of your expenses will help you focus on chasing driver numbers. Office supplies and building repairs are examples of numbers that would be considered drivers. Managing expenses is something that we tend to be good at with the exception being labor expense. It is one of the few expenses that we have control over and is often the difference between highly profitable companies and ones that are circling the drain and struggling to stay in business.
Ask yourself prior to any analysis if you are looking at a results or driver number. Both are important but do not get hung up in chasing a results number as only the driver numbers are under your control.
Mike Kunkel Bill Stevens
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