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Unknown Product Profit Margins

Unknown Product Profit Margins

Unknown product profit margins created unreliable financial information

THE CHALLENGE

Unreliable financial information and unknown margins. A rapidly growing brewery had limited to no internal accounting function. The financial information they did have was not reliable, profit margins were unknown, and no inventory system was in place. A custom margin analysis was necessary for the brewery to grow and scale their business.

Signature Analytics’ Solution:

We calculated the proper COGS for each product line. A custom margin analysis was necessary for the brewery to grow and scale their business. The first step was to understand and calculate the cost of goods sold (COGS) for each product line (in this case, by type of brew). This process includes understanding all costs associated with each product, including personnel and packaging costs.

calculating brewery cogs
unknown profit margins in brewery

We then matched COGS with the sale of the product to analyze profit margins. We compared the COGS to the sales price of each product line.  Doing so provided insight as to which product lines were more profitable than others. It allowed management to adjust their pricing and distribution strategies to focus on higher-margin products, thus increasing the brewery’s overall profitability.

ROI: Increased Profits by 15%

The brewery changed its pricing and distribution strategies based on product margin analysis, increasing overall margins and profits by 15%. Knowing and understanding this information allowed the brewery’s management to adjust their pricing and distribution strategies to focus on higher-margin products, thus increasing overall profitability.

Best Practices for Profit Margin Analysis

  • Know your profit margins by individual product line–not just overall company revenues–in order to
    • Adjust pricing and distribution strategies based on product margins
    • Focus your marketing and promotional efforts on more profitable products
    • Calculate the appropriate cost of acquiring a customer (CAC)
Unknown Employee Utilization & Client Profitability

Unknown Employee Utilization & Client Profitability

Unknown employee utilization and client profitability

THE CHALLENGE

Unknown employee utilization causing unknown or inaccurate client profitability. A growing internet marketing company was not tracking its employee utilization and could not calculate and analyze the profitability for each of their clients. This challenge is not an uncommon one that many services and consulting based companies face. 

Signature Analytics’ Solution:

We calculated the total cost of each employee. We started by implementing a structured time tracking system. Using that data, we were able to create monthly utilization reports calculating every employee’s total cost. The cost incorporated the employee’s wages and additional expenses such as payroll taxes and benefit costs.

utilization and cost per employee summary report
utilization costs per employee and billable rates

We determined employee utilization rates. Comparing the total cost of each employee to the hours worked that were actually billable to the company’s clients (i.e., revenue generated) allowed us to determine each employee’s profitability for the company. Having this information available allowed the company to identify underutilized employees and areas that were not profitable more easily. 

We analyzed profitability by client. We achieved this by comparing the employee’s total costs incurred per project to the revenue generated for each of those projects. Through this analysis, the company was able to identify which of their clients were and were not profitable and why.

employee utilization goals

ROI: Increased EBITDA from 10% to 15% and company value by 50%

After evaluating the employee utilization and client profitability reports, the company reorganized its personnel to maximize each employee’s utilization. They also set employee utilization goals, tied those goals to compensation plans, and adjusted pricing for low margin clients.

Those decisions collectively led the firm to increase its EBITDA from 10% to 15% and its company’s value by 50%.

Best Practices for Employee Utilization and Profitability by Client

  • Maximize employee utilization AND client profitability to increase margin
  • Develop a process to accurately track utilization to better understand your costs per employee
    • Structure employee compensation plans that incentivize efficiency and maximize profitability
    • When increasing costs to the client, be sure your team is still delivering very high value
    • Identify workflow inefficiencies
    • Use technology to automate and standardize lower level, non-value-add tasks
  • Analyze the profitability of each client
    • Identify and purge loss leaders
    • Adjust pricing
    • Understand the lifetime value (LTV) of a client
Knowing Capital Requirements

Knowing Capital Requirements

Identified actual capital requirements to keep the business running

THE CHALLENGE

A broadcast media company believed they needed a significant capital infusion to support their growth plans but were uncertain when and how much capital would be required. It is not uncommon for a company to run into this issue if they do not have a strategic business plan and budget in place that forces them to set, measure, and reach their goals. 

Signature Analytics’ Solution:

We generated a detailed five-year financial projection model. After developing a strategic business plan and budget, we worked with the company’s management to create a financial model that estimated the expected revenues and expenses the company would incur over the next five years. These projections incorporated new products and service offerings, as well as additional employee hires.

capital requirements unknown
capital requirements identified

We then identified capital requirements. From the projections, we were able to identify all the periods in which the company’s cash balance would become negative. Additionally, the model was able to calculate the total capital required to avoid running out of cash.

We determined they would require additional capital even after reaching profitability. Often profitability can be achieved before the company becomes cash flow positive. This is a common occurrence for many early-stage companies or companies in a hypergrowth mode. To support their rapid growth plans and not run out of cash, we determined the company would require additional capital to last until they become cash flow positive.

capital requirements in times of need

ROI: Required 50% Additional Capital Than They Initially Anticipated

The financial model and projections identified the company’s capital requirements, which was 50% higher than they had initially anticipated. Knowing the company’s actual capital needs gave the owners the correct figure to use when raising the capital required to support their growth goals. 

Without an accurate projection, the company would have faced some very trying times and may have had to make tough decisions. This probable outcome would have inevitably changed the course of their business, and their ability to grow and reach their goals, or worse, would have caused them to closed their doors. 

Best Practices for Knowing your Capital Requirements

  • It is essential to monitor cash flow and analyze cash flow projections if you want your business to succeed.
  • Knowing your capital requirements will allow you to maintain a stronger equity position with financial institutions and investors.
  • Avoid asking for too much capital as this will require more equity ownership to be sold to new investors.
  • Alternatively, avoid asking for too little as raising capital can be time-consuming and distract management from their operational responsibilities.
  • Plan ahead while there’s still time to make adjustments.
  • Cash flow is the lifeblood of any small business, be sure you have reliable cash flow management and reporting in place.
Exit Planning Success

Exit Planning Success

Successful exit plan and sale of a business entity

THE CHALLENGE

The client had little to no oversight into their finance and accounting department. They also had under-qualified people performing tasks they shouldn’t be doing for their current skill-set and qualifications. This issue is not uncommon due to a lack of education around the correct structure in an accounting department. Additionally, there’s no monthly close process, and the business was not GAAP compliant. They were also exploring the option to sell one division of the company that was intertwined with multiple entities making it very challenging to value.

Signature Analytics’ Solution:

We provided proper education and training of internal staff. Our team provided comprehensive educational training to the internal accounting department. This training gave the employees a better understanding of our process and why specific reporting was required to improve their finance and accounting functions. We utilized their internal team by placing people into the correct roles and responsibilities they were qualified to perform.

We ensured the company was GAAP compliant and moved to a monthly close process. Our team developed and implemented new processes to ensure the business was GAAP (Generally Accepted Accounting Principles) compliant, which is standard practice. We also moved the client to a monthly close process and developed more accurate, relevant, and timely (ART) reporting while leveraging their internal team to stay cost-efficient. If we have not added tremendous value by putting processes and structure in place, the business would have been sold for a significant discount during the sales negotiation process.

We managed the carve-out process and sales negotiation of the business entity. Our team had to carve out and establish “one entity” for the division that the buyer was interested in purchasing. We used Pro-forma financial statements in addition to GAAP to provide a better understanding of the new entity’s operating results. After understanding the new entities operating results and real value, we managed the sales and negotiation process for the CEO when being acquired by a 3rd party. Our involvement in the sales process was critical in establishing comfort surrounding numbers and operational processes.

ROI: The carve-out, single entity of the larger business sold for over $1 million in 5 months

After providing accounting and financial support for the company for over two years, a strong sense of trust developed around the financial numbers being right before the sales initiation process began. Our ongoing involvement allowed the sales process to run smoothly due to the detailed reporting process we continued to provide each month. 

The company successfully sold for over $1 million within five months of initial discussion, which was in line with management’s expectations. Our team assisted with the transition of the accounting process to the new company to complete the transaction. The original owner is incredibly pleased with the sale’s outcome and knew this could not have gone as well without our financial partnership and leadership.  

Best Practices for Maximizing your Company’s Value Before Selling

  • Start your exit planning process early, this can be years before you plan to sell
  • Most buyers are risk-averse so be sure your revenue streams are solid and are not too concentrated in one area
  • Get your financial records in order and have the reporting to back it up
    • Do this before starting the sales process to eliminate doubt
    • Do not rely solely on previous tax information, you’ll need more in-depth information and reporting
    • Be sure your business’s accounting practices are GAAP compliant
    • Mistakes will cost you and lower your sale
  • Hire a third party to perform an independent audit and valuation
    • This will uncover risks and areas of opportunity
    • Will highlight key business driving to improve
    • The sooner you do this, the more time you have to make big improvements
  • Work with a business advisor to develop a strategic exit plan
Investor Reporting

Investor Reporting

Lacking solid investor report providing little insight for investors

THE CHALLENGE

Lack of investor reporting to satisfy shareholders. A biotechnology company did not have valuable financial information to help facilitate their Board of Directors meetings. The CEO was embarrassed that he was only able to provide financial statements directly from their accounting system, which were difficult for the board members to interpret.

Signature Analytics’ Solution:

We prepared robust, professional-looking management reports. Our monthly board reporting presentation showcased the company’s financial information in a professional manner. We also incorporated graphs and charts to help visualize the data and included commentary on any significant transactions.

investor reporting gross margin analysis
investor reporting working capital trends

Through our reporting, we provided a foundation for meaningful conversations with the board. The CEO distributed the report to board members before their meetings. Doing so allowed them to review the trends of the company’s operations, which helped make appropriate decisions – something that had been more challenging in the past. They were previously flying blind, so having access to these reports ultimately provided more confidence in the business’s future direction and greater peace of mind. 

ROI: Increased Credibility with Board Members & Improved Meeting Productivity

The CEO felt better prepared for board meetings. During the sessions, he focused conversations on key company issues rather than expending time explaining financial results to the group. As a result, the meetings were more efficient and facilitated meaningful discussions, ultimately leading to improved decision making.

Best Practices for Investor Reporting

  • Communicate financial information in an organized and easy to understand format
    • Often a picture or graph is more meaningful than lists of numbers or a spreadsheet
    • Showing trends helps managers visualize projections and see the big picture
  • Let data drive better decision making, don’t depend solely on “gut” decision making
  • A professional presentation imparts confidence and credibility in the numbers
  • Greater visibility from your board of directors typically imparts greater trust when asking for more capital or taking risks