If cash flow is the life blood of any small business, then data is the key to improvement. You have to know what to measure and how to use the data that you develop or else it is all just a waste of time. I am reminded of the lesson I learned when barcode data became all the rage for retailers back many years ago. I heard a business consultant explain that retailers at first drowned in data and didn’t effectively make use of it.
The problem is that retailers developed a way to gather lots of data without coming up with a strategy to use it. You can’t measure everything, and you certainly can’t effectively change too much at once. Thus, you have to decide what data you need and can generate. Then you have to make decisions based on that data over a sufficient amount of time.
If you don’t measure and analyze key areas of your business you could run into major issues with little time to react. Or even worse, you could miss core problems or make decisions that destroy the viability of your company. This is particularly true in periods where pallet cores are hard to come by and lumber prices are spiking, which are both problems right now.
Most companies track basic financials although they may not do much with them in terms of impacting how a company runs month to month. Your accountant probably keeps tabs on your profit/loss statements covering income, expenses and gross profit margin as well as your balance sheet with assets and liabilities. But you may not be looking at these or other key measurements to make incremental changes throughout the year.
Here are some key metrics that you should watch and some insights to consider.
1.) Total Factory Cost – Looks at the cost of manufacturing or repairing the goods you offer to customers. It includes the direct raw material cost plus the labor cost and any factory overhead costs. For pallet and lumber companies, your raw materials costs tend to be your biggest variable expense. As your price to acquire cores or lumber goes up, your pallet costs must increase to keep profit margins at a reasonable level. If you don’t raise prices incrementally over time, you will be faced with losing margin or having to raise prices a lot all at once. Keeping up on the latest lumber market developments is one way to ensure that you not only know what is happening but you can point to third party data that validates the market changes to customers. That is one reason why so many pallet and lumber companies have found the Pallet Profile market report to be a valuable tool, especially as markets spike. For more information, visit www.palletprofile.com
2.) Net Cash Flow – Calculated by subtracting the actual cash inflows and outflows in your operation. Do not include things like unpaid bills or accounts that are outstanding. Only include actual money in and out of your operation for a given time period. This is important as you factor what cash reserves and credit lines are needed to keep your company afloat. This is especially true when you may be experiencing spiking raw material or labor costs. One way that pallet companies deal with this is to work through brokers. Of course, the problem is that you are giving much of your profit margin to the broker who is taking the financial risk of not getting paid on time.
3.) Cost to Acquire Customers (CAC) – It doesn’t take a genius to realize that growing your existing customer base is likely easier than attracting new customers. This is especially true if you sell products or services that are bought on a continual basis, such as pallets. Your CAC is the total cost of landing a new customer based upon the addition of all marketing and sales costs divided by the number of new customers you attract over a certain period of time. A high CAC may be okay if you have a high lifetime value of a customer, but it should be an area that you monitor to determine if your sales efforts are effective.
4.) Revenue Percentages – More than likely, you have multiple sources of revenue. This typically includes pallets, crates, lumber, containers, recyclables, logistics service fees, crossties, cutstock, mulch, pulp, biomass, consulting, etc. Significant changes in the contribution percentage of each key area can indicate major industry trends or are possibly just seasonal market shifts. Your historical data should help you determine if a fluctuation is just a seasonal thing or an indication of a larger issue with either core customers or the industry at large. Then, you may need to go and talk with customers and others in the market to determine what the reasons for these changes are. You may need to put more resources behind a growing market or shore up existing customers.
5.) Churn Rate – While every business both gains and loses some customers, you need to monitor this balance. You have spent a lot of money in acquiring and servicing customers. Every lost customer requires that much more energy to replace. If you start losing a lot of customers, it could signal dissatisfaction with your products or services, new competition or possibly the end of a product cycle.
6.) Productivity – Over time, people have a tendency to get slack and slow down production, especially if nobody is watching to make sure that the pace is maintained at a reasonable level. You should be tracking the production output per hour per shift for each major area of your facility. Notice how different workers handle various jobs as well as how various orders impact the production flow. You may find that some pallet sizes or lumber dimensions are much less efficient than others.
7.) Inventory Size – Your inventory represents one of your biggest assets and one of your largest costs. You want to make sure that you have enough on hand to service your customers and any new business you are seeking to develop. With lumber, where prices can range widely, you may want to increase inventory when a dip occurs if you have the cash reserves and believe the long-term direction is headed in an upward trend. Inventory is a delicate balance that requires a smart, seasoned person to know how to make the right call. You must know when to buy, work down inventories or develop new supply partners. The challenges include proper forecasting of customer needs, buying in cost effective lot sizes, timing the market swings and developing a just-in-time process to lean inventories when business levels require it.
There are other measurements to consider. But these core areas should not be ignored. The more you measure and talk about it with your core personnel, the more you can work to make changes to improve these areas. Remember, if you don’t measure it, your staff will struggle to recognize there is a problem and likely won’t know what needs to be tweaked to fix the problem.
