Call Us at (888) 284-3842
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.
Increased Line Of Credit

Increased Line Of Credit

The right financial information to help increase line of credit

THE CHALLENGE

An expanding international distribution company needed an increase in its line of credit. However, financial institutions struggled to understand the financial information they provided, which was their income statement and balance sheet exported directly from their accounting software. Without a clear understanding of the company’s financial standing, the bank cannot approve their request to increase its line of credit – which they needed to help cover certain business expenses. 

Signature Analytics’ Solution:

We prepared a Quality of Earnings report to simplify the company’s financials. This robust financial information package interpreted the results of the operations. The report included tables and charts, along with a discussion of trends and unusual items, to help the reader (i.e., financial institutions like the bank) better understand the business’s performance.

increased LOC with quality of earnings report
increases LOC identifying one-time charges

We clearly identified expenses that were one-time charges. Through discussions with the company’s management, we identified one-time expenses that were not expected to be incurred in the future. These expenses were “added back” to the net income and earnings before interest, taxes, depreciation, and amortization (EBITDA) to determine the company’s normalized results.

We adjusted EBITDA to reflect one-time expenses. This is a calculation that many investors and lenders use to evaluate a business; however, it had been difficult to calculate with the financial information previously provided by management. So we included the adjusted EBITDA calculation in the report.

increases LOC identifying one-time expenses
increases LOC ebitda analysis

We included graphs and charts to communicate results more clearly. Doing so helped articulate trending and overall business performance for the reader instead of merely providing the balance sheet and income statement.

ROI: Increased Line of Credit by 20%

Presenting the company’s financial information in this way allowed the bank to clearly understand the data and made them more comfortable with the business’s performance. This led to the company obtaining a 20% increase in its line of credit and improved its relationship with the bank.

Best Practices for Increasing your Line of Credit

  • Build credibility with banks by professionally presenting financials in a way that they can easily understand.
  • Interpret the financial information for the investor or lender instead of allowing them to develop their own conclusions.
    • Since management knows the business better than the reader, the results of operations must be explained thoroughly.
  • Don’t show too much or too little financial information. Voluminous information will likely go unread.
    • While not providing enough information can result in the investor or lender to make incorrect assumptions about the business.
  • Present financial information that represents the company in the most favorable light.
  • Anticipate and address the bank’s questions upfront.