Key Performance Indicators: Knowing What Counts

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1 WHITE PAPER Key Performance Indicators: Knowing What Counts Key Performance Indicators (KPIs) are used by successful managers and business leaders to understand whether or not they are on their path to success. KPIs help gauge performance in terms of meeting strategic and operational goals, as well as highlight areas that need attention. You may be collecting and generating reports on a vast amount of data, but do you know how to determine what you should be measuring among the noise? Effective managers and business leaders understand the key performance metrics of their business by distilling them down into the critical KPIs. This white paper will take you through the KPIs that the most successful home furnishings retailers are tracking and you should too.

2 Key Performance Indicators: Knowing What Counts Demystifying the KPI: What is a Key Performance Indicator? You may have heard of Key Performance Indicators or KPIs before. Unlike many other buzz words, KPIs have remained relevant and provided tangible value to businesses for decades. A KPI is a way of measuring how well something is performing. An organization may use KPIs to evaluate its overall success or the performance of a particular activity. In many cases, success is defined in terms of making progress toward strategic goals. Often, success is simply the achievement of some periodic operational objective (close rates, customer satisfaction, store traffic, inventory performance, etc.). Although there are some important KPIs every business owner and manager should know about, specific KPIs also have to be developed to fit the unique information needs of your company, industry, and business strategy. Examples of KPIs include sales growth, profit margins, and operating costs. If your goal is to improve the gross margin (GM) for the business you must first know what your starting point is. Gather the data on overall GM, as well as for each category and vendor. You should also know what the GM is for each sales person. Once you have these benchmarks, you will be able to determine which vendors are at the bottom of the list so you can decide if you can improve their GM, or find a replacement vendor. Knowing which sales person is two to four points of GM lower than the store average tells you which salesperson needs coaching on how to close a sale without offering a deal. When you have the right KPIs, you will be able to set a plan and adjust it along the way to insure your success. Effective KPIs are closely tied to a strategic objective (be it for your entire business, a specific store, or an individual salesperson). Before digging in, think about your strategic priorities as well as key objectives, and how they support each other to deliver the ultimate goal: profitability. Then, write down the questions you need to answer to make decisions that will help you achieve your goals. Finally, pick the top KPIs that will help you answer those questions. (Note: A full list of KPIs is included in the last two pages of this white paper). The KPIs highlighted in this white paper are the metrics that PROFITsystems has identified as the most important and informative; they should provide a good starting point for the development of a performance management system. Once you ve reviewed all of the KPIs listed, we advise that you pick the vital few meaningful indicators that you feel are relevant to your business and can help your decision making. Next, look at your current inventory and sales management system; following this, ask yourself two important questions: a) How easy is it to generate the right reports? b) How may the reports need to be restructured to allow for more effective analysis? Spreadsheets vs. Analysis: The Difference between Measuring and Analyzing If you ve ever spent hours staring at data, you probably know that dozens of spreadsheets can t help you unless you know what you re measuring. Spreadsheets provide a historic view of what happened; however, they do not provide any analysis of the history let alone what the trends are. Only by understanding what it is you re looking for, and knowing how to analyze your data, will you learn if the information being provided is relevant to the decision you need to make. Before we dive deep into the details, let s discuss the difference between measurement and analysis. Measurements are raw numbers showing what sold, who sold it, and how much an item was sold for. An analysis of this data will help you compare measurements and come to conclusions such as what sells better, who has more sales tickets, higher gross margins, largest average tickets, and which SKUs and vendors perform best.

3 Again, it all goes back to the business question you re trying to answer. Although you should always focus on actionable information with a purpose in mind, we ve identified seven KPIs that the most successful retailers are tracking: Break Even Point Turn Rate GMROI Delivered Sales per Square Foot Percent of Repeat Customers per Date Range Net Delivery Cost Percentage Change in Cash Break Even Point A Break Even Point (BEP) is the point at which revenue and expense are equal. Black Friday earned its name because that is when many retailers cross from the red to the black. Every month has a Black Friday: that point that a business will cross from being unprofitable to profitable. Utilizing financial statements is the only way to know when your store breaks even. BEP can help you understand: BEP = fixed cost / contribution margin OR BEP = fixed cost / sales-variable cost How profitable your present product line-up is How far sales can decline before you start to incur loss How much you need to sell before you make a profit How reducing price or volume will impact your profits How much of an increase in price, or volume, you will need to make up for an increase in fixed costs BEP can help your strategic decision making, including long-term planning and financial strategies. It can help you reduce costs, raise prices, and increase sales. Marketing decisions can also be made based on this metric. Every time you hold a sale with a dollar, or percent, off of items, ask yourself if you know how much you will need to increase sales to make it up in volume. The same applies for give-away promotions. You must add the cost of the promotion to current overhead expenses in order to determine your new break even point. In the example below, the business works until the 27th of each month before hitting their BEP, which only leaves them three days to generate profit. Their breakeven is approximately $260,000 each month and their three days of profitability only bring in $28,889. If they could reduce their fixed expenses so that their BEP is closer to $225,000, they would pass their breakeven point on the 23rd. Four extra days of profitability would add an additional $38,519 to their bottom line that is 134% more profit added to their coffers! In addition, banks will want to know if you can pay off debt before loaning money for a new building or delivery truck. Lenders will want to know at what point you become profitable each month to determine whether you are a sound risk. Now ask yourself: Are you looking at your financials once a year? Once a quarter? Do you know your best month? What makes that month so great? How would the ability to look at your Break Even Point, on demand, impact your business?

4 Turn Rate Turn Rate is simply the number of times you will sell the value of your inventory. Let s analyze two examples. If Store A has a turn rate of 2 and Store B has a turn rate of 3, is Store B better? Not necessarily. For example, Walmart has a very high turn rate but terrible gross margins. In contrast, Rolls Royce has very low turn rate and exceptional gross margins. Turn only indicates velocity and nothing more. Bedding (BDG) and living room upholstery (LRU) have the highest turn rate in this example. Bedding is generally not stocked very deep as it is a quick shipping item. Because there is a small investment, the turns of that amount are double the rest of the categories. Living room upholstery most likely has more inventory on hand, but because it is a high demand item, it also has a higher turn rate. Compare that to the area rug (RUG) category. Most of the living room displays have a rug to create the wow factor. There might even be a display of rugs the customer can buy and take with which leaves a high investment compared to the number of rugs actually sold which contributes to its lower turn rate. GMROI: Gross Margin Return on Investment If you could own one of two similar businesses, each producing equal margin volume but one of them carried greater inventory, which one would you choose? Of course, you would choose the business with less inventory. There is wide variation in inventory levels among comparable home furnishing operations. The direct result is that the higher inventory businesses experience lower profits and less cash flow than their competition. This, in turn, limits sales growth due to fewer funds being available for re-investing. Gross Margin Return on Investment (GMROI) is an inventory profitability evaluation ratio that analyzes your business ability to turn inventory into cash. It is calculated by dividing the gross margin dollars by the average on-hand inventory cost. GMROI = Gross margin $ for one year / average inventory $ on hand

5 A ratio higher than 1 means that you are selling your merchandise for more than what it costs your business to acquire it. The opposite is true for a ratio below 1. Although used widely in business, GMROI is particularly important in the retail industry, where stock turn and Gross Margin Percent can vary heavily by SKU, location, and time. In working with thousands of retailers for over 35 years, PROFITsystems has incorporated the tools needed to automatically: Calculate Sales Velocity Track true landed cost Factor in selling price changes and markdowns Keep track of multipacks Track vendor shipping lead times This information, available at the Vendor, Category, and Item level means retailers have a dynamic view of their inventory performance. With this information, they can benchmark their product, locations, vendors and more and then act on the low performers. WHAT IS THE TRUE IMPACT OF GMROI? Sales of $1,000,000 at 45% GP = $450, turns = $220,000 average cost: $2.05 GMROI Sales of $1,000,000 at 45% GP = $450, turns = $157,000 average cost: $2.87 GMROI Oh, and we freed up $63,000 of cash! Sales of $1,000,000 at 50% GP = $500, turns = $200,000 average cost: $2.50 GMROI Sales of $1,000,000 at 50% GP = $500, turns = $142,900 average cost: $3.50 GMROI Delivered Sales Per Square Foot Delivered Sales per square foot is the average revenue a retail business generates for every square foot of sales space. As a business owner or manager, you need to know which categories are performing well, where you can make space for new collections, which departments can be trimmed or should be expanded, and which vendors are over or underperforming. This metric helps you make those decisions and improve your overall profitability. How do you know what s good? 1. Measure dollars per square foot by vendor and category, benchmark your store s current productivity, ask vendors for advice, and check industry trade magazines. And, we ve now freed up over $77,000 in cash! So isn t it easier to concentrate on the item / category / vendor GMROI and let the dollars flow to the bank?

6 2. Once you know where you stand, seek to improve dollars per square foot performance by putting up new signage for additional pieces to a collection that can be ordered, encouraging warranty sales, or pushing add-on items such as accessories, mattress pads, etc. Sales per Square Foot Example: Dining room (DRC) and bedroom (BRM) have the largest dollars generated per square foot. Let s imagine that a bedroom and a living room are each displayed in a 10 x 12 space. The sofa might be $1000 and the loveseat $950 for a total of $1950 in sales revenue. Bedroom sets with in the same store will sell for $4000. That scales works at lower price points and at the higher end as well. Accessories, being smaller and lower price just don t compare in revenue, but they help showcase the larger products. Living room occasional tables (LRO) are well below the store average. While they aren t as pricey as a living room or bedroom set re-merchandising might bring that closer to the overall average. Percent of Repeat Customers Isn t the fact that a business has traffic enough? Why monitor at all? If you have a weekend sale to your private customer list and the week end was successful that means the marketing worked right? Have you ever asked yourself what if the traffic was just coincidental walk-in traffic and not a direct consequence of your marketing? Without monitoring, you run the risk of using the marketing piece again only to have it fail. Understanding your new-to-repeat-customer ratio can help you improve in a variety of areas, including marketing and customer service. If you re selling mostly to new customers, you may need to asses what s causing the low customer loyalty. Ask yourself: Are you providing below-par customer service? Are your products meeting quality expectations? Is your public marketing so effective in bringing in new clients that your percentage of sales in previous years appears low? Are the demographics of your location such that you expect more new than repeat customers? (e.g.: an affordable store in a college town might draw new college students every year) If you re selling mostly to repeat customers, you may have to revisit your marketing and messaging, or research whether your product is dated and only appeals to people who have purchased similar goods in the past. The good news is that this may also indicate that you have excellent customer service and extremely effective private marketing campaigns in place. In the end, the main reason you need to measure and track your percentage of repeat customers is that 20% of the market is constantly becoming unavailable because they move, cease buying new furnishings, or die. Your goal should be to know what is working to replace that 20% and knowing your customer metrics will answer that question.

7 Net Delivery Cost Do you know what your Net Delivery Cost is right now? For every return trip your team has to make due to an error, how much additional revenue will be needed to make up for the cost? For every free delivery that a salesperson throws in, how much additional revenue is needed to make up for the cost? Delivery cost = number of stops / delivery expense What should be included in your total delivery cost figure? To put it simply, anything that is required to make your delivery service function. Everything from wages to the blankets used to wrap the furniture are considered as a cost of the delivery function. Many retailers are stunned to learn their delivery department is far more expensive than a quality local white glove delivery service. You need to know when delivery costs are spiraling out of control and when they make sense. If a business delivers its own product the expense as a percent of sales will vary throughout the year. Typically, a business will employee enough people to handle the busiest quarters of the year. November January are the lowest months as a percent of sales as these are the busiest sales months. In the summer when the business slows down, they are still employing the same delivery people. Retailers who use a delivery service show a much steadier rate because they pay only on the deliveries made and are not required to maintain a staff during the slower months. Change in Cash Change in cash is often seen as a natural by-product of what happens when sales occur, a product is purchased, and the business is operated. Keeping a close eye on cash flow and forecasting what is likely to occur over the next quarter, or year, is a vital step many businesses skip. Why should you care? Think about every time you wrote a personal check to cover payroll. Are you on top of your accounts payable? Do you know what is due and when? Having reports for inbound freight with cash flow calculations based on invoice terms is invaluable in managing cash flow. Are you able to identify employee theft? If inventory is in line, AP is low, and sales are up yet cash is down, someone may be taking it. Using system installed bank reconciliation will spot anomalies in cash flow. Do you have the cash reserves needed to expand the business, open a new vendor line or renovate your store? Changes in cash vary as product is order, sold and replenished. However, even with the spikes in cash below over time their cash on hand is decreasing. If a business doesn t track the cash changes it would be easy to miss the declination. The large inflow would seem to offset the outflow. Only by careful monitoring does the diminishing trend show up.

8 Next Steps Don t get lost in the list of hundreds of KPIs you could be measuring. You have to start somewhere. The seven KPIs discussed in this white paper should be at your fingertips at any point in time. The information you can gather by diligently tracking these metrics is vital when you sit down with a representative to discuss product performance, visit with your banker, or even measure your store and staff performance. About PROFITsystems, An Accellos Product PROFITsystems is the leading software solution for the home goods and furniture industry. Key components of the retail solution include enterprise software, consulting, performance groups, advanced education, group-buying freight programs, ecommerce and business intelligence. PROFITsystems features real-time inventory management, customer relationship management, pointof-sale and accounting systems. For additional information on PROFITsystems, please visit the website at: ABOUT ACCELLOS Accellos is a global provider of software solutions specifically designed for the unique needs of logistics service providers and midsized businesses. Over 4,000 companies trust Accellos to be the technology backbone of their global supply chains. Accellos provides solutions for warehouse management systems (WMS), third party logistics (3PL), fleet management, transportation management systems (TMS), electronic data interchange (EDI), retail store operations, automated barcode data collection, parcel shipping, transportation optimization and supply chain business intelligence. Accellos solutions are built on the AccellosOne platform, a modern technology platform featuring a user-friendly interface and simplified technical administration. For more information, info@accellos.com or visit FOR MORE INFORMATION: info@accellos.com or visit Accellos, Inc. Key Performance Indicators White Paper

9 KEY PERFORMANCE INDICATORS KPIs FINANCIAL Total Sales Gross Margin Operating Cost % for a date range by Profit Center Variable Cost % for a date range by Profit Center Fixed Cost % for a date range by Profit Center Break-even Sales Cash Today Change in Cash period 1 and period 2 Cash Projections Contribution Margin Debt to Equity Debt to Total Assets Financial Leverage Fixed Expense Percent Variable Expense Percent Interest Coverage Long-term Debt to Equity Financial Leverage : Total Assets / Total Equity Debt to Total Assets : Total Debt / Total Assets Debt to Equity : Total Debt / Total Equity Long Term Debt to Equity : Total Debt / Total Equity Administrative Cost Percentage : Administrative Expenses / Sales for a date range Occupancy Cost Percentage : Administrative Expenses / Sales for a date range Advertising Cost Percentage : Administrative Expenses / Sales for a date range Finance Cost Percentage : (Finance Expenses - Income) / Sales for a date range Net Income % for a date range Customer Deposits Aging AR INVENTORY MANAGEMENT GMROI by PC, Category, or Vendor for a date range Written Sales per Profit Center, Square footage by PC, Category, or Vendor Inventory Turns [(Cost / Average Inventory Value) / Days] * 365 for a date range Inventory Turns [(Cost / Average Inventory Value) / Days] * 365 for a date range by PC, Convert Open Sales per Profit Center Square footage by PC, Category, or Vendor Delivered Sales per Profit Center, Square footage by PC, Category, or Vendor for a date range Opportunity to a sale percentage by PC "Close Rate" for a date range Gross Margin Percentage for a date range Sales Growth Percentage: [(sales for period 2 - sales for period 1) / sales for period 2] * 100 by PC, Category, and Vendor Percent of returns/service orders per vendor Total sold inventory vs available inventory Inventory to sales percentage Dollars per square foot of accessories Aging Inventory Percent of Best Sellers In Stock SALES MANAGEMENT Customer Appointments per Sales Person Sales by Sales Person Traffic by PC & Salesperson Close rate by PC & Salesperson Average Sale by PC & Salesperson Delivered Sales per opportunity per profit center T: Key Performance Indicators (KPIs) Accellos, Inc.

10 Key Performance Indicators (KPIs) Delivered Sales per opportunity per category Delivered Sales per opportunity per vendor Written Sales per opportunity per profit center Written Sales per opportunity per category Written Sales per opportunity per vendor Revenue per Opportunity by PC & Salesperson Sales Today Convert opportunity to a sale percentage by Category "Close Rate" for a date range Convert opportunity to a sale percentage by Vendor "Close Rate" for a date range Written Sales by salesperson by date Delivered Sales by salesperson by date Percentage of repeat customers for a date range Percentage of repeat customers for a date range by PC, Category, and Vendor Convert opportunity to a sale percentage by salesperson per month "Close Rate" for a date range by Month and Salesperson Selling Cost Percentage : (Delivery Expenses - Income) / Sales for a date range Total Sales to Goal by Profit Center, salesperson Follow up WAREHOUSE/DISTRIBUTION CENTER PO s Due into Warehouse Profit Centers by Date Range and Profit Center Inventory Received Today Warehouse Cost Percentage : (Warehouse Expenses - Income) / Sales for a date range Average time to prep Average time to receive Cycle inventory exceptions Damaged goods SERVICE Customer Service Cost Percentage : (Finance Expenses - Income) / Sales for a date range Number of Open service orders Average Days to close service orders Service per vendor Cost per unit being repaired Closed tickets per repair person Credits to customers Disposed of products DELIVERY Deliveries by Truck Today Number of Stops Average Piece Clean deliveries v requiring second stop Damages to product Damages to customer s home Time per stop Dollar value of product per stop Net Delivery Cost Percentage: Delivery Expenses / Sales for at date range Average value per truck load T: Key Performance Indicators (KPIs) Accellos, Inc.