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Guest Post: Why key performance indicators are so important to your businessSeptember 19th, 2017 by
In today’s guest blog post, we’re proud to introduce you to our friends at the Bath & Kitchen Buying Group (BKBG), the largest shareholder owned-and-operated kitchen and bath buying group in North America. BKBG Executive Director, Thad Whittenburg, shares which key performance indicators all bath and kitchen showroom remodelers should be focusing on, and explains why these performance indicators are crucial to the success of one’s business.
Why key performance indicators are so important to your business
The topic of key performance indicators (KPIs) is a must-learn for business people who run a kitchen and bath company. We’ve all heard, “You can’t improve what you can’t measure.” It is a universal business truth that I highly encourage you to take to heart. Spending time and resources improving KPIs will improve your bottom line. I’ll be providing my top KPIs in a series of blog posts for you.
Today, we’ll talk about one of the most important KPIs, margin erosion. This is one of the most important KPIs because it has the biggest impact on profitability, productivity, team morale, and customer experience, among other things. It has a powerful effect on overall performance but is often overlooked by business owners and managers because it is a hard metric to measure without a process in place to do so. However, once your process is established, it’s very easy to capture this metric.
Margin erosion is defined as the amount of margin loss that occurs from the initial quoting phase through project completion. The activities where margin erosion can occur include quoting, ordering, design, shipping, product issues, labor, customer credits, etc.
Margin erosion is calculated by subtracting the percentage of erosion from the anticipated margin. For example, if you budgeted 38% margin but lost 3% due to having to credit a customer for damaged products, your overall margin would decline to 35%. On a $30,000 project with 3 points of margin, erosion means you would have $900 fewer dollars of margin than anticipated. It doesn’t seem like a lot on a project of that size, but it has a significant impact on your bottom line annually. If a company’s annual revenue is $3 million, and it has an average 3 points of margin erosion on those sales, the cost to the company $90,000. That’s not exactly chump change! An average K&B business has a 3% to 5% point annual margin erosion. That equates to $90,000 to $150,000 in lost revenue every year and that loss does not include additional shipping cost, lost productivity and less than stellar customer experiences.
Actions for you
Here’s an exercise to help get you into the process of tracking margin erosion. Count the number of delivery invoices, including will-calls, during a two-week period generated to fix problems. Divide that number by the total number of invoices for the same period. If you had 26 total invoices and 13 were generated to fix problems, 50% of your invoices represent lost profitability due to margin erosion.
This exercise will give you a pretty good idea of how to pinpoint margin erosion and help identify what’s causing it. For that, take a focused look at why those invoices were generated.
If you think your number isn’t going to be very high, think again. Most likely half of your invoices are dedicated to fixing problems. Take 30 minutes to determine if your number is better than 50% and let me know how well you did. I would love to hear from you — Thad@buybkbg.com.
Next time, we’ll talk about:
- Gross Margin Per Person: A true measure of team’s performance and efficiency.
- Turnover – How to keep it under 15% + the benefits you will gain from it.
- Customer Survey Results – How to keep it above 90%.