When people join The Gemini Program and adopt its principles, we tell them they have to open their books to the employees. “Well, count me out,” you say. I understand. That’s pretty much the response we get from everyone. Truth is — and you might be surprised to learn this — most small-business owners do not review their profit-and-loss statements or balance sheet regularly. They don’t even like to share their P&L with their accountant or banker, let alone their employees. So if that’s the norm, what are we really saying when we talk about opening the books?
First, let me say I understand why owners don’t review their P&L very often. By itself, it doesn’t tell you much. And just about everybody dislikes going over the books at the end of the month. Besides, your bookkeeper says they can’t get the P&L to you until the third week of the following month because they have to wait for the bank statement and invoices to come in. That’s one of the reasons a P&L doesn’t tell you much: three weeks later, it’s too late to do anything about it.
So, again, if we insist owners open the books to their employees, what are we really talking about? To understand the answer, we have to look beyond the standard P&L and ask ourselves what it can tell us aside from whether we made a profit last month — even if we do get it three weeks late.
The buzz phrase these days is Key Performance Indicators, or KPIs. Every industry has them. The hotel industry tracks occupancy rates, accounting firms track billable hours; advertising agencies track revenue spent on advertising. (When an agency says they do $1 million, it means their actual income might only be 10 percent of that number.) All those KPIs are not reported on the P&L; they are derived from the P&L. Plus you already derive some KPIs yourself. For example, sales per salesperson, gross profit margin on hot tubs, revenue per square foot or revenue per employee.
We like to break KPIs into one of three categories: those that are useful and informative by themselves (Are sales above or below last year?); those useful as trends (Is average sales price trending up or down, or are margins getting squeezed?); and those that are most informative when compared to others in the same industry (revenue generated for every $1,000 you spend on advertising, or how much your service tech sells in parts). Of course, being able to compare all three categories with others in the same business gives you the best opportunity for making improvements. If you knew some companies have service techs who generate more than $100,000 each, wouldn’t it be useful to know how they do it?
Over the years, as we’ve helped companies improve those KPIs, we’ve identified which performance measures demonstrate whether a company is driving profits or is just in business. Some of these numbers come from analyzing the P&L, others analyzing the balance sheet. All of them let you compare results with others in the industry.
These are the books you open for your employees. You show them how the company is doing, what the averages are in each critical sales area, and what each person is doing. If you monitored every one of these KPIs and shared them with your staff, every one of them would improve. When you compare numbers with other dealers, the areas of business with the most potential for improvement will emerge.
Key Performance Indicators
Here’s a sample of Key Performance Indicators to help determine productivity and profitability:
- Total sales by sales person*
- Revenue per employee
- Closing ratios*
- Gross profit margin on all major lines
- Inventory turns (total gross profit divided by average inventory level, not gross sales divided by inventory). For example, we know a company with annual revenues of $3 million that is not turning inventory at least four or five time a year has too many dollars tied up in inventory.
- Service revenue/service technician*
- Parts revenue/service technician*
- Billable hours/service technician*
- Revenue generated per $1,000 of advertising
- Payroll and taxes as a percent of revenue
* Post these lists every month where all employees can see it. No one likes to be on the bottom of the list, particularly month after month.