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The Importance of Gross Margin by Segment

The Importance of Gross Margin by Segment

By Mike Derringer

Do you have multiple product lines or categories? Are you tracking the activity separately? If not, then do you really know where your cash is generated, and where it is being lost? A quick, real life example will help illustrate why this is important.

In this example, this local business has 10 different products being sold. They have the ability to split the sales and costs but chose to look at the combined numbers – the details bored them. However, they could not understand why their results were so much lower than those of their peers – they were netting 3% while their peers were around 20%.

We started by breaking out revenue and costs by line, splitting the fixed and variable costs (more on the importance of fixed vs. variable in a forthcoming article later). We separated fixed costs and analyzed the expenses, finding a few minor tweaks that made a slight difference (up to 4%) but we still knew we were not where we wanted to be.

The next step was breaking down the fixed and variable costs by product. After sorting through the data, we found that of the 10 lines, 8 were at or above the industry benchmark of 50% and more importantly, 2 were below the benchmark. Both were older contracts where the costs significantly outweighed the revenues, to the point of negative margins. Big time negative. We were faced with two options – renegotiate the dated contract to the point of profit (or to at least break-even), or to walk away from the business. Because of the strong relationship we had with the customer, we chose to sit down with them and talk it out. It turned out to be an easy conversation – the customer admitted that we were so far below our competition that they were wondering why we were priced so low. We were able to negotiate a new 5-year deal with gradual increases to get back to our 50% target margin. This still left us below our competition, so the customer was happy. Once the impact of these changes started flowing into the business, we found the business to be healthy again – cash was positive, getting stronger every day, and the owner was much more relaxed.

The point of this illustration is to consider: have you taken the time to break down your products and take an individual look at them? Are your margins below that of your competitors, to the point where you are bringing down the benchmark? Maybe it’s time to take a deeper dive into the numbers. The results could be significant.

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Welcome Brian Weyer

Welcome Brian Weyer

Welcome to the FocusCFO Team!

Brian has more than 30 years of executive management and leadership experience involving finance and accounting while collaborating with organization’s leadership teams to attain revenue, profit and market-share growth. His experience includes working directly with entrepreneurs on issues ranging from strategy planning to day-to-day operations. Brian and his wife Evelyn live in Dublin, Ohio.

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TriMor Testimonial

TriMor Testimonial

We’re so happy to have FocusCFO as part of our team. From our initial conversations with Forest through onboarding, and now the strategic support and guidance, their model has created a bonding internal and external connection. It’s a perfect blend of experience and expertise at a pace that makes the investment extremely valuable. If you’re a growing enterprise and need that extra nudge of leadership, consider this organization as a fabulous option.

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The Benefits of Having Your Fractional Executive On-site

The Benefits of Having Your Fractional Executive On-site

by Forest Bookman

By far, the resounding challenge employers face today is finding and retaining good people. The best organizations are a direct reflection of the people they employ. The right mix of talent and employee satisfaction separates the good from the great and in many ways becomes the key ingredient to success.

In today’s Gig Economy and virtual society, having a flexible schedule often carries a lot of weight in the decision criteria for employees and employers. Whether interviewing new candidates or discussions with seasoned contributors, business owners are having to consider workforce flexibility resulting in less control and visibility. The millennial generation is receiving a high level of unsolicited scrutiny under this new approach, however the concept may hold a component of unexplored brilliance. The abundance of ideas obtained through today’s networking community, that would otherwise not been accomplished from behind the desk, can bring great value to business vision and advancement. Expanding your resource pool can sharpen best business practices directly related to your industry and those closely affiliated. The competing argument that a flexible schedule can provide greater efficiencies in a twenty-four hour work day is demanding attention.

The Flexible Workforce

So exactly what does the business owner wrestle with when facing this topic? For one, it can have a detrimental effect on productivity when considering the set of processes, procedures and values required to be a harmonious organization. But moreover, business owners tend to be more concerned about culture erosion and having to determine equality when it comes to how flexible is fair. So what happens when you blend flexible and required?…sensibly balanced, but controlled to establish the soft skills that make teams extraordinarily successful. Respectfully, the employer must be able to calculate the return on investment of an employee that has chosen a flexible schedule. The concept of having to deliver some percentage of work on-site would capture the need to quantify the flexible calendar. The required percentage of on-site performance would vary given certain responsibilities, but allowing the employer to build metrics into the equation would enable some measurement of attained value. Additionally, a percentage of on-site stipulations would allow the flexible employee to establish a sense of camaraderie and corporate principles engendering positive behavior, loyalty, and corporate identity. Sometimes you’ve just gotta be there to create unity and share the success!

The Business Owner Hat

As a small business owner, my attention was consistently drawn to revenue generating activities. Daily and weekly interactions often found a conversation wrapped in client relations or processes that differentiated our product and service. Distribution of responsibilities based on transactional, tactical and strategic initiatives required daily, weekly and quarterly monitoring. Management discussions focused on individual abilities to become industry experts and the skills required to measure performance and relative feedback. Leadership meetings were chock full of creative ideas intended to drive monthly, quarterly and annual victories that hopefully became routine with a lasting impact. When necessary, business matter experts were assigned to supplemental projects typically utilized under an interim basis. Monthly peer groups continuously instigated the concept of working “on the business” more often than “in the business” leaving me curious and inspired for more. Obligations to the corporate advisory council were designed to keep overall performance in check to the satisfaction of our clients and stakeholders.

Outsourced In-House

Today, many virtual solution providers are successful at keeping the outsourced price down for their service, but have difficulty providing added value to the related in-house tasks associated with the relationship. Business owners need to keep a healthy pulse on their enterprise, so having a general knowledge of the daily metrics can reduce risk and increase awareness of potential issues. In order to achieve this level of confidence, there must be ways to measure progress and results, often referred to as a “dashboard”. Having the capacity to address situations with hands on delivery, demonstrates the organization’s ability to adapt and respond to changing conditions. While fractional services are rapidly becoming a high value solution, incorporating on-site delivery holistically addresses the benefits of having a qualified professional without costly overhead and attrition. The fractional work solution is relatively void of corporate noise that can “water down” the effectiveness of high functioning executives. Consequently, the fractional leader can establish a meaningful relationship with the company while focusing on long term goals and objectives. Those “on the business” initiatives become part of the “in the business” conversations under this type of engagement. Fractional activities that are brought on-site provide tremendous results that build into continuous improvements of growth and value. Having an experienced professional on-site that owns the delivery process ensures the list of strategic ideas turn into effective business tools that support the operation. On-site delivery empowers the leadership team to measure projected results “in person” as facilitated by the corporate vision. Bringing your virtual relationship on location to develop a winning solution at a fractional cost is just sound business practice.

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