How many games must a major league pitcher win in order to be considered a cut above? What is the magic batting average a major league hitter must achieve to make the cut between outstanding and mediocre? How many yards must a NFL running back gain in a season to be considered “among the best?” How about yards gained in a single game? Or average yards per carry?
The answers: 20 games; .300 batting average; 1,000 yards; 100 yards; 4 to 5 yards.
In both the sports world and in the business world, these kinds of measurements are called benchmarks. Setting benchmarks is a good way for owners, managers and salespeople to judge their levels of success. Working without benchmarks is like playing a game without keeping score— it’s difficult to know whether you’re winning or losing. In business, as in sports, setting benchmarks helps bring out an organization’s competitive spirit.
High jumpers who can clear 8′ are not created overnight, so based on your current performance, it’s important to establish goals that are realistic. This is true for both business goals as well as for sports-related goals. You don’t have to set goals that are up in the stratosphere—at least not in the very beginning. In 1895, the Olympic record for the high jump was 6′ 5-1/2.” In 1993, a record was set that still holds today. The record was established by Cuba’s Javier Sotomayor at 8′ 1/4.”
I personally believe that Olympic records have continued to be broken year after year because Olympic athletes measure their results each time they compete. When an athlete achieves a personal best, it doesn’t necessarily mean that he or she won a medal. It means that he or she jumped higher or ran faster or lifted more than he or she has ever done in the past.
In business, personal best scores or company best scores may be achieved, but no one knows about the accomplishment if no one is keeping score.
The moral of the story is this: Keep Score! And when you know the score, then raise the bar!
Here are a few of my favorite benchmarks for our industry that I believe can be enhanced if owners, managers and salespeople are more diligent about keeping score.
- Return on assets. 15% pre-tax on beginning assets.
- Net margin. Between 4% and 6% before taxes is just about optimal for a privately owned, independently run building supply business. 2 ½% to 3% is about average.
- Debt to equity. If total capital is made up of debt and equity, then equity should represent 60% of total capital.
- Current ratio. This ratio refers to the relationship between current assets and current liabilities. In the building supply industry, we look for $2 in current assets for every $1 in current liabilities.
- Personnel-related expenses as a percentage of gross profit dollars. A building supply business that is able to control personnel-related expenses (compensation, worker’s comp., group medical and payroll taxes) to 60% of gross profit generated will usually earn an optimal level of bottom line profit. (This benchmark is my personal favorite.)
- Outside sales expenses. My favorite benchmark for outside salespeople is controlling salespeople’s total expenses (commission, salary, benefits and travel expenses) to 3% of sales and or 13% of gross profit dollars.
- Average collection days. Forty to forty-five days is about as good as it gets. Dealers who allow average collection days to exceed 60 days become especially vulnerable to credit losses.
- Average sales per outside salesperson. In 2015, the average outside salesperson generated between $2 and $2.5 million in sales.
Each time you achieve a new personal best, be sure to raise the bar and, over time, you’ll most likely see your productivity steadily improve.