What Makes Your Business Money!

Early in our relationship we establish profitability goals. These goals are a centered on each client’s Key Performance Indicators (KPI’s). These are the critical items to monitor and work on in order to improve their success. Each client might have different KPI’s to watch. They become your financial roadmap.

A Brief Case Study

For example, ABC Distributing has historically had significant swings with their inventory turns. When inventory movement begins to slow profits can fall by as much as 75% because the cost of carrying the inventory erodes the profit margin. ABC is in a competitive market so they cannot raise prices to offset profit dips, nor can they reduce the workforce because the cost to hire and train new workers is extensive due to the work environment at ABC.

The simple answer is to plan for the slowdown and reduce inventory purchases. In this case though ABC cannot easily do this because they have locked into an annual contract that guarantees a certain discount if they purchase a large enough volume. Reducing the inventory for the several months would in the end cost them more because they would lose their volume discounts.

What Would You Do?

In the case of ABC there may be multiple options to consider. One option might be to offer key customers a larger discount in the several months in question to move the inventory. Even if profits are still lower due to the discount any amount saved still flows to the bottom line and their customers will remember the goodwill.  If price adjustments are not an option, by understanding the KPI’s ABC can proactively plan, set aside reserves or negotiate lines of credit in advance to prepare for the shortfall.

Bowden and Wood will help you identify and monitor the KPI’s that impact your bottom line.