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Managing
costs is a key job of every businessperson. To do this,
you should always track your gross margins, cash flow
and operating profit as a percent of revenue over time.
When these percentages shrink, particularly if the
shrinking is a trend, you could be heading for trouble.
To
get an idea of where your margins should be, it is easy
to compare your company with large companies by using
online financials services such as Multex. But these
services are generally for large, publicly traded
companies. A better way to go is to visit your library
and look for comparisons in the Risk Management
Association's (RMA) Annual Statement Studies. There you
will find a variety of financial ratios for small,
privately held companies compiled from U.S. federal tax
returns. These ratios can serve as benchmarks.
The
RMA ratios are organized by industry sector - by SIC
code or NAICS code. Not only is data organized by
industry sectors, but also by revenue and assets. The
information is also trended over the last five years so
longitudinal comparisons can be made.
The
revenue breakdowns are (in dollars) 0-1; 1-3MM; 3-5MM;
5-10MM; 10-25MM and 25MM and over. An example of
benchmark cost ratios for variety stores (SIC Code 5331)
follows in Figure I:
Figure
I
Risk Management Association's
Annual Statement Studies Profitability (cost control)
ratios
Variety Stores (SIC 5331)
Let's
look at the traits of a highly successful,
cost-conscious variety store - the 99 Cent Stores. With
its stock up about 40% over the last 24 months, 99 Cent
Stores (symbol NDN) has handily beaten the performance
of the S&P 500 and other major exchanges. The
company is one of the lowest cost operators in the
ultra-discount retail field. Ultra-discount stores --
known as dollar stores -- sell such items as nail
polish, napkins and novelties. After establishing
themselves in a market niche, they are moving upmarket
to challenge supermarkets by selling everything from
butter to bridal shower baskets -- for $1 or less.
Between 1998 and 2002, sales of the 99 Cent Stores grew
by 26% and earnings at 21%. More importantly, 99 Cents
stores sported a 15.1% operating profit margin - healthy
for any retailer (See Figure I). The key to success,
says 99 Cent Stores CEO Eric Shiffer, is discipline in
controlling costs.
The
company watches its costs everywhere. For example, it is
always on the lookout for price breaks. It looks for
brand names on close outs or other special situations.
Then it buys truckloads to get bulk discounts. And it
pays quickly to get prompt payment discounts and to
maintain a good business relationship so it will be
offered the next good deal. If the company can save
money by picking up merchandise from a vendor rather
than having it shipped, they will do it.
Shiffer
goes beyond saving money on buying. 99 Cents Stores
saves money on operating expenses by emphasizing staff
productivity. Employees are encouraged to work as
efficiently as possible. For example, when hauling goods
to stock shelves, the staff is encouraged to fill the
dollies to reduce the number of trips required to
complete the stocking process. Shiffer tells all
employees to run the business as if it were their own.
To put his money where his mouth is, all employees are
granted stock options.
Watch
your profit ratios over time to see where you are
heading. See Figure II for the longitudinal operating
profit trend for variety stores. Superimpose your
operating profits on a graph like this. If you spot
trouble, talk to your CPA, trade association or join a
peer group such as The Executive Committee or The
Alliance of CEOs. Or just call The BENTLEY companies. We
have worked with hundreds of companies and would be
delighted to help yours.
Figure
II
Operating Profit Ratios
Small Variety Stores
1997-2002
Dave Bonini
is a managing director of The Bentley Companies, a
business consulting firm located in Silicon Valley.
For information on the company, go to
www.bentleycos.com
or send Dave an email
here.
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