If you could see my desk right now you would almost certainly describe it as “cluttered.” It makes me feel overwhelmed and unsure of where to start. So many choices: Log the information from all the business cards to the contact management system; scan the documents that clients have given me in hard copy; get rid of the dust?
If you can relate to a cluttered workspace, consider that this is not the only kind of clutter we have to deal with. We also deal with information clutter. The results are the same: We feel overwhelmed and unsure of where to start. The fact is that a business can be run well with only six pieces of information on management reports (as long as the numbers are current).
- Revenue Growth Rate
Managers should focus on growing revenue by at least 1.5 times the market growth rate. A company that is gaining market share in a growing market has unlimited potential to grow in the same market. On the other hand, a company that is losing market share has a limited amount of time left in the business regardless of the market's growth rate or decline.
One caveat is that the sustainable growth rate should be greater than the revenue growth.
- Gross Profit Margin
Let's say that a company has revenue of $1 million per year and used $500,000 to cover general and administrative expenses (overhead). If they spent $600,000 for cost of goods, the gross profit margin is 40 percent.
Did they break even? No, they lost $100,000. They would require revenue of $1.25 million to break even. If instead they spent $400,000 for cost of goods, the gross margin is 60 percent. Break-even sales would occur at $833,000.
Reimbursement cuts drive decreases in gross profit margins and, thereby, decreases in the break-even sales level. So if gross profit margin is not tightly managed, the remaining options are to decrease overhead, or decrease profit.
- Productivity
which drives nearly all of the general and administrative expenses of any business. It is expressed as revenue per full-time equivalent employment. When more revenue is processed by each employee, then less space is required to process the revenue because fewer people are required. If less space is required, then less electricity, insurance, computers and so on are required.
There are three ways that a company can change its productivity: 1) making more efficient processes, 2) increasing the length of service of recurring revenue products and 3) changing product-payer mixes.
- Asset Turnover
Asset turnover is the measure of how much revenue is generated with $1 of assets. If one company generates an average of $1,000 per year for each concentrator and another using the same model generates an average of $2,000 per unit, the first has an asset turnover of about 2 and the second of about 4 (assuming the concentrator costs $500).
If both have the same annual revenue, the first will own twice the number of concentrators, have more cash tied up and a lower cash flow as a result. The first will also have more maintenance expense. This concept applies to accounts receivable and inventory, too.
- Length of Service by Product (LOS)
This is the average number of months a patient receives service of a product. Costs associated with intake, delivery, pick-up and maintenance, etc., occur one time for a patient. If nine months' revenue is collected, the profit from the patient will be greater than if six months' revenue is collected.
Increasing LOS accelerates sales growth, increases asset turnover and improves productivity. For capped rental equipment there is an optimal LOS, and for all others, the goal is to make it as long as can be achieved.
- Activity Cost by Product
This should be updated once or twice per year, not monthly like the previous five metrics. Knowing these costs is the only way to know how much profit a product contributes to the bottom line. One product with a higher gross profit margin than others may actually have a lower net profit margin. The net profit margin is by far the more important of the two numbers to know and manage.
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Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. You can reach him at 321/752-4514 or wweeks@weeksgroup.com.
