Behind the curtain

Properly analyzing the data within your company is critical. Most financial reports (and financial analysts) primarily do so by using percentages.

Net profitability margins provide us with a good example. Achieving a 10 percent net profit margin (NPM) after all your bills are paid and you, as the owner, are paid a reasonable salary indicates that your company is doing OK but it could do better. Attaining a 15 percent NPM is excellent and hitting 20 percent is outstanding. However, percentages don’t always tell you the complete story.

How it works in the field.

Many years ago, I was assisting the chief estimator of a landscape installation company in New England prepare his company’s annual budget. After looking at previous budgets and historical data, I didn’t think that he put enough labor dollars (and man-hours) in the budget. He thought that he had. Upon further analysis, it became apparent that he was correct.

The historical data that I had reviewed was from the previous four or five years. During that time, the company’s field productivity had improved 31 percent. Five years prior, the average field man-hour of landscape installation work produced a total revenue of $57. (Calculate this figure by dividing total sales by total field man-hours – not to include subcontractor costs or revenue.)

I refer to this figure as sales per man-hour (SPH). This figure had improved to $75. Interestingly, all of the percentages from five years prior remained the same. Had I just looked at percentages during my analysis, I might have missed the 31 percent productivity improvement. Today, this company’s SPH for its landscape installation crews averages more than $111.

During a similar budgeting exercise with a chemical application company, I saw how just concentrating on percentages could distort the analysis of what was happening in the company. The percentages in the budget that we had prepared showed that field labor increased as did the general and administrative (G&A) overhead costs. However, the NPM percent had decreased slightly. One of the staff members mentioned that he had a budget that we had prepared 14 years earlier. When we took a look at it, you can see what we found in the chart below.

The percentages showed a negative trend in production and the NPM but it showed an increase in the G&A overhead. However, analyzing the same data using a per man-hour basis showed just the opposite in productivity and profitability. It showed a 58 percent increase in productivity and a 100 percent increase in NPM.

What to analyze.

Here are some critical numbers that I suggest tracking by using the per man-hour analysis method.

• Sales per man-hour (SPH): Divide your division sales (minus subcontractor revenue) by total field man-hours (not to include vacation, holiday and paid time off man-hours)
• Net profit per man-hour (PPH): Divide NPM (before taxes but after depreciation) by total field man-hours
• G&A overhead per man-hour (OPH): Divide G&A overhead costs by total field man-hours
• Gross profit margin per man-hour (GPMPH): Divide GPM by total field man-hours
• Material per hour (MPH): Divide materials cost by total field man-hours
• Equipment per man-hour (EQPH): Divide total equipment and truck costs (include fuel, depreciation, repairs, mechanics, auto and Inland Marine insurances, etc.) by total field man-hours
• Calculate all of these for each of your divisions.

Conclusion.

Business owners and their staff need to analyze data within their companies by using tools that provide an accurate and complete picture of what is happening within their businesses. Using only a traditional percentage-based methodology can distort the true picture of what is happening. Also, adding man-hour based analysis to your tool box might provide you with additional insight as to what is or is not happening in your company.