An improving top line of a business creates excitement, and the bottom line funds you into the future while your Gross Profit gets you through the next few months. Assuming you are pricing your products to earn a profit, a failure to hit your Gross Profit target is an operations failure. You need your operations to be productive. They should never allow direct costs to increase faster than sales.
The best way to ensure operations are productive is to be relentless in monitoring the percent of your primary direct costs against what they should be. You best protect your Gross Profit by keeping your COGS variable with sales. Every time a direct cost is higher than it should be, you will see a corresponding decrease in Gross Profit unless you counter the higher cost through a timely cost reduction in another area.
Below are the monthly Key Results Indicators (KRIs) and their respective metric formulas associated with operations that tell you how well your business is “doing work:”
Gross Profit Percent Month-to-Date: Net Sales – COGS for the month divided by Net Sales
Gross Profit Percent Year-to-Date: Year-to-date Net Sales – YTD COGS divided by YTD Net Sales
Revenue per Direct Payroll: Net Sales divided by Direct Payroll Costs for the month
Cycle Time: Customer Authorization Date divided by the Payment Receipt Date
Average Order Value: Order Gross Sales divided by the number of orders received for that period
Merchandise Cost as Percent of Sales: Material Cost divided by Net Sales
Direct Labor Billable Rate: Total number of billable hours divided by total number of direct labor hours paid for the week
Direct Labor Overtime Ratio: Total direct labor overtime paid divided by the total direct labor regular hours paid
Percent of jobs closed ahead of contracted completion date: Total number of jobs completed early divided by the total number of jobs completed in that period
Equipment Availability Rate: Total number of days equipment is unavailable divided by the total pieces of equipment times 30
Return on Asset Ratio: Net Income for the month divided by Total Assets
Apply the above equations to your financial statements to learn where operations cost you more money than they should. All that is needed is financial statements you can trust prepared on time to learn where you need to intervene in operations to earn a higher Gross Profit.