The Benefits of Benchmarking

By Scott A. Hackworth

Understanding industry performance benchmarks and their impact could mean the difference between simply operating your business and excelling in the industry. When provided with the right tools, you can gain significant insight into the operations of your company in a short amount of time.

Using ratio analysis

Ratio analysis is vital to the successful management of any business. The term “financial ratio” basically refers to the comparison of one financial performance indicator with another, such as relating bottom-line profits to sales in the form of net profit margin.

These ratios are then used to chart a company’s progress, uncover trends and compare its performance with peers in the industry. Considering a financial ratio, as opposed to absolute dollar figures, is useful for relating how profitable and productive your business is.

Locating key benchmarks

Just as absolute dollar amounts are inadequate in assessing your company’s success, so too is a financial ratio inadequate unless there is a comparative against which to gauge performance.

Such comparatives, or “benchmarks,” can be in the form of:

• Your firm’s own historical performance over time.
• Your firm’s budgeted or planned performance.
• Industry statistics.

Comparing your firm’s numbers with any of these benchmarks can provide important insights about your company’s performance. Recognizing that performance benchmarks are needed for assessing your company’s strengths, weaknesses and improvement opportunities, you may ask: “Where can my company obtain such valuable information?”

Most CPA and accounting firms can provide this type of analysis of your business performance. The down side is that the cost of this service often exceeds $1,000. Even at this price, though, the analysis would more than pay for itself.

By enabling you to monitor company expenses, gross profit margins and turnover rates easily, a business analysis would help you quickly identify improvement opportunities, and the resulting gains would more than cover the initial outlay.

Fortunately, there is another resource: AOPA’s recently published Operating Performance and Compensation Report. This study gives the O&P industry performance benchmarks against which O&P patient care facilities can compare their own experiences.

Maximizing the value of benchmarks

When comparing your own company’s performance with historical data or industry statistics, it is important to remember that key performance measures are excellent yardsticks for gauging the success of your business, but they must be understood—not just applied blindly.

For instance, if the profitability of your firm is far below the industry norm, it is important to know why. Is your business really suffering, or is your profitability purposefully low because you are paying higher salaries?

Major differences that appear between the chosen benchmarks and your company’s performance should be investigated and explained. Occasionally, you will find that an anomaly has occurred, and no further action is necessary.

For areas in which improvement is needed, though, you should define specific goals for your organization and identify the strategic actions needed to meet those goals.

If you want help, management consultants are an excellent source for identifying the steps needed to achieve specific targets. It is important to note that since companies differ depending on their customer mix, location, size and other factors, any two companies can be successful, yet some of their performance measures may still differ greatly.

Key ratios to monitor regularly

Recognizing that an almost infinite number of possible financial and operating performance ratios exist, a key challenge of making comparative ratio analysis meaningful is to identify which ones are most useful to your business and decide how often you should monitor them.

The table identifies 14 suggested ratios for monitoring performance on a monthly, quarterly and annual basis. These ratios are listed as a possible framework for you to adopt or to serve as a guide for developing a similar set of measures that may better suit your situation.

As shown in the table, the key dimensions of management that should be monitored on a regular basis are:

• Sales performance;
• Margin management;
• Employee productivity;
• Asset management; and
• Liquidity.

O&P industry benchmarks for each of these ratios—as well as many others—are provided in the 2004 AOPA Operating Performance and Compensation Report. By comparing your own company’s key performance measures with the industry figures and by tracking your own company’s performance over time, you will be well positioned to notice and quickly react when adversity strikes.

Scott A. Hackworth is a senior project director with Industry Insights Inc., Columbus, Ohio. Industry Insights prepared the 2004 Operating Performance and Compensation Report for AOPA.

 

How to become a profit leader

By Robert V. Leimkuehler, CPO

Profit leaders. That’s what we all want to be. But how do we get there? And what exactly are profit leaders?

According to the AOPA 2004 Operating Performance and Compensation (OPC) Report, profit leaders are those companies in the top 25 percent that get the best return on their investment of assets.

How do we do what they do to become more profitable?

Analyze your assets

The OPC Report revealed that the asset turnover of profit leaders was almost twice that of all respondents: 29.3 percent compared to 17.5 percent for all companies. What’s more, their return on assets was more than three times that of all respondents: 76.5 percent compared to 20.1 percent.

By taking a serious look at asset turnover and the return we get on our asset investment, we can make changes that will make our businesses more profitable.

Keep an eye on expenses

Profit leaders also have better control of their expenses. The cost of goods sold in profit leader companies was 42.5 percent of net sales/billings. In all companies responding, it was 46.2 percent.

Overall, the Report showed that the operating expenses expressed as a percentage of gross profits was 69.9 percent for profit leaders and 81.5 percent for all respondents.

That seems to be an area where improvement is possible and needed for those companies that do not rank in the profit leader category. Take a closer look at what your expenses are. How can you control them? It is time to take a look at everything you do that is an expense to your company.

Get better control of A/R

One of the biggest problems in our industry today is accounts receivable. The cause of this problem is the change in the medical industry to third-party payers. Profit leaders’ accounts receivable were out 41.7 days on average, compared to 60.3 days for all respondents.

How can we improve this situation when it feels as if our hands are tied? Here are some suggestions:

• Create a policy for billing patients. What can and should you collect up front?
• Get your patients involved to help you collect in a timely manner. Your patients can be your best advocates with the insurance company. Remember, they are the customers of the insurance company, either privately or through an employer.
• Have a policy in place that gives you guidance on when to write off bad debts.

Be more productive

Generating more sales dollars per asset turnover is a function of employee productivity. Profit leaders showed more sales per employee overall than the rest of the respondents. This included all staff members and all practitioners.

Profit leaders had smaller companies than the average. High profit leaders showed $1.1 million in sales as compared to the average of $1.5 million in sales. Profit leaders also had fewer employees than the average: 11.2 employees as compared to the overall average of 16.6.

This shows that profit leaders are generating nearly the same amount of sales as the average O&P company, but with fewer employees.

How productive is your staff? Do you have ways to measure and monitor productivity?

Where does your company rank in sales?

Other attributes

The Report showed that all profit leaders had more concentrated prosthetics practices than orthotics practices. How can we make orthotics more profitable?

It also showed that profit leaders have less debt overall. How can you reduce your debt?

Track company trends

The key to transforming your company into a profit leader is to keep an eye on company performance. Year to year, look at the changes that have occurred in your business. What is different? What factors changed to make one year better than another?

How to use the OPC Report

In these tough economic times, with the three-year Medicare freeze, competitive bidding and discounting to insurance companies, O&P facilities need help. And help is here, in the form of the AOPA 2004 Operating Performance and Compensation Report.

This Report gives you the chance to do something to help your business by comparing it with others similar to yours in the field and make analyses based on that comparison. With this tool, you can correct discrepancies and make your business more profitable.

You don’t have to be a financial guru to use the Report. It uses the median values rather than the mean, so that values are not distorted by a few unusually high or low figures that could be that way due to special circumstances.

Percentages, ratios and dollar figures are all used in the Report, and this is important as we compare company performance in different areas. For example, a useful measure of effectiveness of compensation expense is the percentage of payroll to sales. Percentages and ratios are also used to compare performance from one year to the next. We really need to look at both the dollar figures and the percentages to get the full picture of how our businesses are doing.

The Report breaks out results by all responding companies, in comparison to profit leaders, by net sales/billing and by community size, making it easy to find the best comparisons for your company.

Also, it looks at key business figures, including:

• Profitability
• Productivity
• Inventory
• Leverage
• Accounts receivable
• Compensation
• Employee benefits

When is the last time you seriously looked at the whole picture? Industry Insights, the company that prepared the Report and conducted the survey, has done this for us. During a presentation at the AOPA National Assembly last fall, we polled the audience and found that the general consensus was to do a business survey every two years. We plan to do that and to stay with Industry Insights to give us more consistent results for comparison.

I feel this survey is an invaluable tool to help us run a more profitable business.

So, what can you change to make your company more profitable? How can you become a profit leader?

By using some of the guidelines here, we can all make our businesses more profitable. 

Robert V. Leimkuehler, CPO, is president of Leimkuehler Inc., Cleveland, Ohio. He served on the task force that helped to develop the Report.

 

A Simple Way to Compare Your Financial Performance to Industry Averages

By Mark Emery

Benchmarking your operation’s financial performance against others in the industry is an important exercise that should be done at least annually and, if possible, on a quarterly basis. It’s like a thermometer that measures the health of your business.

Also, putting together a number of quarters or years can show you some valuable trends within your business. However, all of this is still history, and most of us—even we accountants—tend to get more excited and interested in what the possibilities are for the future.

With that in mind, I’d like to focus on a couple of areas where Microsoft Excel can help make benchmarking information useful in your future planning.

Benchmarking tools

In putting together a sample spreadsheet to help O&P facilities compare their businesses to others, I used the 2004 AOPA Operating Performance and Compensation (OPC) Report, which was published last fall analyzing 2003 numbers.

This is my first time reviewing the Report, and I had two reactions as I read through it: the response rate was good and the detail of information was impressive. These reactions are based on experience I have had with similar compilations from other industries.

So, congratulations to those who participated in responding and those who developed the survey.

Setting up your spreadsheet

All of the analyses you will be making can be put on one spreadsheet and, with the copy and paste functions in Excel, can be built in about 30 minutes.

When you are setting up the spreadsheet, you’ll want to see a number of outcomes—all of which are based on your facility’s data. You will want to compare your data, as a percentage of sales, to those reported by the profit leaders. The profit leaders were identified in the OPC Report as those companies representing the upper 25 percent of respondents based on return on assets figures.

Then, we will look at what it would take, in absolute dollar terms, to get your facility up to the profit leader level. And, we’ll do a little “what if” work that will enable you to do some planning for the future.

If you take a look at the sample spreadsheet I’ve included, you will notice that the format is quite simple and includes the line items directly from page 32 of the Report. There are just a few columns needed, including ones for entering your facility’s data, profit leader data, a variance column and an area for playing “what if.” Also note that I have entered some numbers in the “Your Data” and “What If” columns just for presentation purposes and for no other reason.

So now, let’s take a look at how this spreadsheet is constructed.

Entering your data

Under “Your Data,” there is a column for entering the dollar amounts for each line item of income and expense from your facility. The data you enter can be either your annual or quarterly income statement data. Use the sum function in Excel to speed the process of adding up a group of numbers, such as “Total G&A Expenses.”

The other column under “Your Data” is the percentage column, where everything is calculated from the information in the dollar amounts column and represents each line item of income and expense as a percentage of net sales/billings. Use a formula to do this percentage calculation, and copy and paste the formula to all of the cells in this column, always making sure to have net sales/billings as the denominator in your formula.

If you participated in the survey and got a copy of your facility’s report, your percentages should match what’s in that report. Now you have your facility’s data both in absolute dollars and as a percentage of your net sales/billings.

Compare yourself to profit leaders

Moving across the spreadsheet, the next set of columns are the profit leader data. Here, I entered the percentages for each line item as shown on page 32 of the Report. Then I used a formula in each line of the “$$” column that takes a facility’s net sales/billings and multiplies it by the profit leaders’ percentages located in the “%” column. This gives you a glimpse of what your facility’s performance would look like if you had the profit leader results based on your revenue.

In the next column, named “$ Variance from Leader,” I used another formula in each line that takes the absolute dollars from the “Your Data” column and subtracts the absolute dollars from the “Profit Leader” column. This shows you, on a line-by-line basis, where your facility’s performance is either better or worse than the profit leaders. In this case, “better” means higher revenues or lower expenses.

I found this useful to show, in absolute dollar terms, how much you would have to adjust your business to achieve profit leader results.

Playing “what if?”

The last column, named “What If Revenues Change?” again uses formulas to calculate results. Here, I entered a number in the net sales/billings line of this column and then used formulas in all of the other lines in the column that take that number and multiply it by the corresponding percentages in the profit leader column.

The net sales/billings number can be changed to anything you want and, every time it is changed, all of the other numbers automatically change as well. This will allow you to see what your results might be in the future at various levels of revenue.

If you want to go a bit further, you could use your actual percentages instead of the profit leader percentages to see what your facility’s performance might look like if you had the same type of results as in the past.

A useful business tool

Too many O&P businesses concentrate on the day-to-day struggles involved in remaining profitable while ignoring the long-term analysis and projection that has helped others achieve greater success. Benchmarking is a way to analyze company performance, identify weak areas and formulate strategies for future improvement.

Tools such as the AOPA 2004 Operating Performance and Compensation Report are helpful to gather the information you need for future projections. This spreadsheet is a practical way of using the information provided in the Report, and I hope it gives you another tool to make your business more successful. 

Mark Emery is the treasurer of AOPA. He is with Ossur North America in Aliso Viejo, Calif.

New AOPA Report Offers Industry Benchmarks The all-new 2004 AOPA Operating Performance and Compensation (OPC) Report provides the most complete, accurate and up-to-date comparative financial and compensation information available anywhere for the O&P industry. The study has been designed to serve as an easy-to-understand, actionable tool for industry firms to evaluate their company’s results in order to pinpoint strengths, weaknesses and improvement opportunities. In addition to providing overall industry results, the report includes data groupings based on sales volume and primary community size. These additional categories allow industry members to identify themselves more closely with the reported figures. A special breakout of the study’s most profitable companies, based on return on assets, reveals key differences between the most profitable companies and the rest of the participants. The 2004 OPC Report is available to AOPA members for $159 and to nonmembers for $318. To order, contact the AOPA Bookstore at (301) 362-6910. For more information, contact Kerry Stalknecht at (571) 431-0876, ext. 254.