Skip to content
  • 214-244-7227
  • robb@cfoforrent.com
  • Home
  • Blog
  • Contact Us
cfo-logo-hover
  • Robb
  • November 21, 2023
  • 0 Comments

As we urge every CEO and business owner to do, we compare actual results with the projections the client made at the beginning of the year, whether it’s a formal budget with staff accountability or not, and we ensure a discussion with management follows. Even without staff accountability, there is value in management learning what differed from what they had estimated only a few months ago, and looking beyond the basics for answers that will drive better results. Here’s a short example of that interaction with a current client, a product distribution and service company.

The monthly results were published. Revenue fell short but the bottom line beat the profit projection. Then we compared key elements as a percentage of total revenues, and that revealed that Gross Profit Margin (GPM) was 51% vs. the projection of 44%, each measured against their respective revenue projections. That was the lion’s share of the profit improvement, and it turned a mediocre projection into a solid gain. We saw that a dollar of sales cost them less than they thought it would. Let’s go further.

We next calculated the percentage of revenue of each element of Cost of Goods Sold (again, against their respective revenue numbers, so that the anticipated relationships are preserved).

Their labor provided to customers is their most profitable offering, and it’s an essential part of every sale, so we looked there first. The percent of revenue projected was 12%. Actual percent of revenue achieved 12%. Clearly not the contributor we were looking for.

Next, parts and components that are typically part of every sale came in 2% under the projection. No one recalled any comparison between vendor invoiced costs and the client’s price list to see if a price increase differential was the reason, so some homework to be done there.

Then we got to equipment – the largest dollar category but the least flexible in price due to supplier controls. Turns out their equipment sales cost 5% less as a percentage of sales than forecasted. That’s a big number. Why did that happen? Product mix? Price list revisions? Missed budget (always a possibility)? More homework to check that out, but we felt pretty good that the resulting research would give us information that would enable us to do a couple things better:

  1. Compare our price lists with vendor invoice costs to see if we are keeping up with passing cost increase through to our customers, or over-compensating,
  2. Help our marketing and sales teams drive their efforts in optimally profitable versions of the sales plan, with new information, and
  3. If needed, help to improve our forecasting accuracy with more real data.

This is more analytical than the traditional budget variance analysis, that looks at dollar differences by line item and stops there. A bit more homework. But it’s also more useful in driving management actions than analysis based on dollar variances alone. Better data, better analysis, better results. Perhaps you should consider it. Why do we say that? Because…

We are Your CFO for Rent.

  • accounting budgets Finance for Nonfinancial Managers financial management financial reporting planning profit improvement small business Your CFO for Rent
  • Share This Post

Categories

  • Board of Directors (60)
  • Controller for Rent™ (153)
  • Entrepreneurs & Business Owners (314)
  • Entrepreneurs and Business Owners (2)
  • Exit Strategies (88)
  • Finance Mentoring (289)
  • Management (44)
  • Non-Profits (156)
  • Real Estate (11)

Popular Tags

  • accounting
  • balance sheet
  • banks
  • board of directors
  • book
  • budgets
  • cash
  • cash flow
  • cash management
  • CFO
  • CFO for Rent
  • economy
  • education
  • employment
  • exit
  • finance
  • Finance for Nonfinancial Managers
  • financial management
  • financial reporting
  • fund raising
  • Gene Siciliano
  • governance
  • growth
  • hiring
  • investing
  • lending
  • loans
  • M&A
  • management
  • money
  • Non-Profits: This Blog's for You
  • nonprofit
  • not-for-profit
  • part-time CFO
  • planning
  • profit improvement
  • real estate
  • retirement planning
  • risk management
  • sell the business
  • small business
  • strategy
  • taxes
  • training
  • Your CFO for Rent

Please feel free to contact us at 214-244-7227 or robb@cfoforrent.com
for an exploratory conversation with no obligation.

We will be glad to hear from you.

Get In Touch

© 2024 CFO For Rent - Western Management Associates. All rights reserved. Website by Avodah Web Solutions.