In this article we will review the financial KPIs you need on your dashboard to help you assess the financial performance of your shop. We’ve previously discussed the benefits of dashboards for job shops and the operational KPIs you need on your dashboard.
The first three metrics work together in tandem and provide the overall picture of your financial performance (T vs OE). Those metrics are Throughput-margin, Operating Expense, and Net Profit.
Financial Dashboard KPI #1: T vs OE
The object you want to link to.
Throughput or as we like to refer to it – Throughput-margin
Throughput-margin is the Revenue your company brings in less the Totally Variable Costs (also call Truly Variable Costs).
Totally Variable Costs (TVCs) are the costs that you incur if you make a job or do not incur if you do not make a job. For example, materials, outside services, freight in/out, sales commissions, packaging/crating are all examples of TVCs.
Direct labor, depreciation, and overheads would be examples of expenses that are NOT a form of TVC. They are included in Operating Expenses (see below).
We know, we just caused a riot because we said Direct Labor is NOT a TVC.
To further explain, check out this video segment from our online CPE course The Fundamentals of Throughput Accounting (2.o hours CPE credits)
Operating Expense
Operating Expense is all the money you must spend to run your business.
Utilities, insurance, taxes, lease expense and direct labor plus your selling, general, and administrative costs are all included in Operating Expense.
Operating Expense is a great metric to track because it represents your breakeven point in terms of Throughput-margin dollars.
When T=OE, you’re at breakeven.
You won’t find the breakeven point looking at a GAAP/cost accounting financial statement (nor a lot of other things. See our CPE course How Cost Accounting Distorts Decisions (2.5 hours CPE credit) to learn more).
Net Profit
It should go without saying, but we’ll say it anyway: Net Profit!
Net Profit is simply Throughput-margin less Operating Expense.
Many owners do not monitor their bottom-line, and it’s a shame. It’s absolutely essential to running a business, yet many owners are confused by the accounting reports their ERPs generate and throw their hands up in frustration.
Many owners have the experience of having a productive month on the shop floor and yet the financials are terrible. Then they have an unproductive month on the shop floor and the financials look beautiful.
What’s going on here?
What’s occurring is that the allocations of “cost” to the balance sheet (i.e. inventory) are distorting the profitability the income statement is reporting.
Unless you’re using Throughput Accounting to manage your business, you will be misled by the cost accounting distortions and prevented from understanding the true financial drivers of your business clearly.
This is what we do in Velocity Pricing System – use Throughput Accounting to identify the real financial drivers of your shop’s profitability.
Financial Dashboard KPI #2: Financial Productivity
A ratio below 1.0 means you are losing money(T<OE), a ratio of 1.0 means you are at breakeven (T=OE), and a ratio greater than 1.0 means you are making money (T>OE).
Some folks would tend to think of an efficiency-type of measure at the mention of productivity. If you know us, you know we don’t like the word efficiency.
This measure is NOT about how efficient you are from a cost-world perspective. It’s about how effective you are from a Throughput-world perspective.
The more Throughput-margin your shop can generate, and the faster you can generate it, the better this measure will be.
Financial Dashboard KPI #3: Operational Productivity
You would be right if we were talking about the traditional, cost-world measures of Operational Productivity. However, we are actually defining Operational Productivity using the Throughput World definition.
We define Operational Productivity as the Throughput-margin for the company as a whole divided by the Time it took to earn that Throughput-margin.
Again, as with the Financial Productivity metric, the more Throughput-margin your shop generates, and the faster it generates the Throughput-margin, the better this measure will be.
Throughput-Thinking: Would you have thought an operational metric would include dollar signs? Why not? Remember the book The Goal? The goal of your company is to make money now and in the future, so why wouldn’t you want to view Operational Productivity in light of the goal? One of the ways we guide your operations in Velocity Pricing System is by defining what productivity is in terms of generating more Throughput-margin for your company.
These are 3 of the basic financial KPIs we like to see on dashboards for job shops.
You need not be a CPA to read or make sense of your financial statements. In fact, with T, I, and OE, Beau believes these three measures make you much more financially savvy than your CPA!
There are other metrics we might employ on a dashboard in Velocity Pricing System, such as tracking prospective or actual penalty dollars associated with a Mafia Offer. This would allow you to see the cost of any non-performance – before you actually have to pay out on a guarantee.
Alternatively, we might monitor inventory levels of key items if deemed to be important from a managerial perspective, such a key raw material stocks or levels of kanban items or finished goods.
We might also track cash velocity or any number of other measures specific to your unique situation.
The key is to have a deep understanding of your special circumstances and ensure your dashboard is appropriately tailored to reflect your unique and different situation.
In our next article, we’re going to discuss something no one else is talking about with regard to dashboards: What metrics should NOT be on your dashboard!
Wishing you success from the Science of Business TEAM:
Blah, blah, blah – who cares? The key is that our clients get results! Ask us about paying based on YOUR results!
P.S. If you’re ready to go beyond looking at data, and are ready to IMPROVE, check out Velocity Scheduling System to improve lead-times, improve due date performance and reduce chaos!
P.S.S. If you ready to understand how you really make money and take your profits to the next level, check out our Velocity Pricing System (it’s more than just pricing)! It’s the ultimate jobs shop costing system – understand how, where, why you make money (or not). Understand your capacity and resources so that you can quote fast and ensure profitability.
P.S.S.S. This is Part 3 of a 5 Part series. Read the entire KPIs and Dashboards series.
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Very informative information. I do have a question regarding KPI # 3 (Operational Productivity). When you define that KPI as Throughput-margin divided by Time, how do you define “Time”? Is it defined by summing all hours worked in that month (by everyone in the company?), or is it Time in terms of calendar dates?
Enrique, Thanks for the question. It depends on the particular situation.