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Benchmarking your Financial Performance

The TRSA Industry Performance Report (IPR) Survey

benchmarking your financial performance

What’s it worth to benchmark financial performance with others in your industry? Very often, a substantial, distinctive dollar amount is added to your company’s bottom line. Here’s what two linen, uniform and facility services executives said about the value of their participation in TRSA’s Industry Performance Report (IPR) survey:

“I was able to double my line of credit at the bank by using my individual FPR to convince my banker that I was one of the high profit firms in the industry.”

“Thanks to the FPR we doubled our profit in three years.”

Historically prepared free for every TRSA company participating in the survey, the “FPR” is the customized financial performance report that makes it easy to compare your key financial metrics with other companies in the industry. This year, that same benefit will be available to Universal Unilink industrial laundry members at no cost.

Respondents’ data is treated confidentially by the Mackay Research Group. No one from TRSA or its staff can access individual company data and it’s published in the IPR in a way that prevents identification of any individual company.

Your FPR provides benchmarking data for a variety of decisions across all business functions. Overall, benchmarking guides you in:

  • Assessing what’s important: identify strengths and weaknesses, end speculation about your company’s relative performance, receive evidence to rethink assumptions based on industry standards
  • Making informed decisions: save resources based on industry wide efficiencies
  • Motivating employees: identify below-competition team performance, reward good performance, support compensation decisions

Business can be a maze with no recognizable end. You know you want to go someplace better (increased sales, profitability, return on investment, etc.) but without a realistic idea of what to achieve, you don’t know where to go and might get lost in the maze. Benchmarking is key to quantifying your goal and identifying guideposts to reach your destination.

What You Give

Most data you provide for the IPR comes directly from your accounting records: your company’s income statement and balance sheet. When you provide these documents, you automatically answer most of the survey questionnaire. You also provide indicators of company size (numbers of locations, routes, customers), market mix (F&B, healthcare, hotel, industrial), workforce size and capital expenditures. See “Data You Provide to Get Free Report” insert in this article.

What You Get

If you’re like most respondents to the IPR survey, you’ll find the best indicators for improvement by comparing your income statements to those of the most profitable companies in the report. You’ll also benefit from benchmarking with all respondents as well as just those similar to your operation in:

  • Market mix (primarily F&B, healthcare or industrial, or a balance of all three)
  • Number of locations (plants, depots)
  • Total sales volume

Income statement line item comparisons prompt you to consider if your company’s spending is generating an industry-leading or lagging return. Extrapolated from findings in the 2017 IPR, based on operators’ 2016 data, Table 1 compares two hypothetical linen, uniform and facility services operations each with the same annual sales ($3 million).

Table 1 – Income Statements
All-Respondents Median Performer

balance sheeet-All respondents

High-Profit Median Performer

high profit median performer

One hypothetical is extrapolated from the “all-respondents median (typical) performer:” the one that ranked #21 in profitability among all 41 companies responding to the survey.
The other hypothetical is extrapolated from the “high-profit median performer:” the one that landed in the middle of the top one-quarter (10) of respondents in profitability or #5 overall in profitability. This high-profit performer has a 3-basis-point (bps or percent of sales) edge in operating profit over the all-respondents median; income statement line items provide clues about why.

The typical performer exhausts almost 1.5 more bps in merchandise, which means the high-profit performer can sell just as much in a year without spending so much on merchandise. If you were the typical performer, you might be very confident in the economy of your distribution practices and conclude the high-profit performer is shorting customers to save money. Or you might not be so sure of yourself and admit the possibility that customers are abusing or losing your textiles and your staff could do a better job keeping this in line. Or maybe you’re paying too much for merchandise.

Either way, you’re thinking more about merchandise practices and how yours compare with competitors, possibly portending a change in your practices.
This table also shows the all-respondents median at a nearly 4 bps disadvantage in plant costs. In dollars, this suggests the possibility for the disadvantaged performer to increase profitability 40 percent by better controlling these. Because plant costs comprise such a large portion of expenses, the IPR asks survey respondents to report on 10 categories of these (Table 2).

Table 2 – Plant Costs
All Respondents Median Performer
vs. High-Profit Median Performer

plant costs-all respondents vs high performers

Note the difference in bps (1.5) between these two companies in production labor costs and the gap of nearly 1 bps when the three utility line items are combined. You might immediately speculate that the high-profit performer has newer, more efficient equipment or more automated processes. Plus the typical performer has significantly higher depreciation (2.4 more bps), suggesting this company has more equipment that isn’t running as efficiently. The high-profit performer may invest in upgrading equipment more frequently, given its additional 0.7 bps in building and machinery costs.

This raises a key point about income statement items. Higher expenses don’t always drain profitability. You’ve got to spend money to make money. But do you spend wisely? Table 1 indicates both performers spend an equal amount on sales, but the high-profit performer invests 1.5 bps more in its delivery function. This line item includes fuel and other delivery expenses but the majority is service labor. The 2017 IPR puts the labor portion of this line at 60 percent for all respondents. Perhaps the high-profit performer’s additional labor is going into better controlling merchandise and prompting service personnel to recognizing upselling opportunities.

Both companies in Table 1 would benefit from comparing with other operations with market mixes similar to their own. For example, in the 2017 IPR, the high-profit median performer’s market mix consists of almost 39 percent F&B volume and 18 percent outpatient medical customers, with about 7 percent in hospitals and nursing homes. F&B is also the largest market for the all-respondent median performer (26), but hospitals/nursing homes is second (24) with outpatient medical at only 11.

Still, both Table 1 companies fit the profile of a “mixed” operation in IPR parlance, given that neither has a majority of volume in any specialty (F&B, healthcare or industrial). The median mixed performer’s merchandise costs are 0.6 bps higher but its plant costs are 2.7 bps lower than the all-respondents median. Delivery is higher, too (1.8). The high-profit performer has lower merchandise and plant costs and comparable delivery expenses. This suggests that market mix factors are not entirely responsible for the all-respondents median’s performance shortfalls relative to the high-profit performer, but indicates it would be worthwhile to at least discuss the benefits of shifting the mix.

Both Table 1 companies are also single-location operations. The 2017 IPR median single-location company has merchandise costs 0.3 bps higher, plant costs 2.6 bps higher and delivery costs 0.9 bps lower than the all-respondents median’s performance. Judging from these metrics, this typical performer is more like the high-profit performer than the single-location median company. However, the IPR shows profit before taxes is comparable (the single-location median is at 7.1 percent, just 0.1 bps less than the all-respondents median).

Temperature Check for Your Business

How does these businesses’ overall financial health vary? Benchmarking balance-sheet data indicates the differences. Table 3 shows the two companies’ assets are comparable, suggesting they have equal ability to attract financing. But the high-profit performer has almost three times the amount of cash on hand. The IPR also provides balance sheet data by market and company size to facilitate benchmarking between operations similar in these respects.

Table 3 – Assets – Balance Sheet
All-Respondents Median Performer

assets-all respondents

 

High-Profit Median Performer

assets-high profit performers

The IPR calculates financial ratios and return-on-investment paths for you and other respondents you benchmark with to facilitate additional comparisons to assess your business’s health. Key examples: your profit margin, asset turnover and financial leverage are calculated from the data you provide. These drive two key paths: return on assets and return on net worth. These ratios and paths are shown for the actual all-respondents median performer and high-profit median performer (not the $3-million-annual-sales hypotheticals previously described in this article) in Table 4.

Table 4 – Return on Investment
All-Respondents Median Performer
vs. High-Profit Median Performer

return on investment

Return on assets is profit margin (a percentage) times asset turnover (the number of dollars produced in sales for every dollar in assets). Put another way: profit before taxes divided by net sales times 100. This is a key measure of the economic viability of a business; it should at least equal the cost of capital. Note the high-profit company’s performance is more than 10 times (1000 percent) better than the typical performer.

Return on net worth examines the return being generated for the company’s owners. It’s calculated by multiplying return on assets times financial leverage (a factor of outside contributions to assets). It expresses the company’s profit as a percentage of net worth. Here the high-profit performer is twice as good as the typical performer.
John Mackay of Mackay Research Group, TRSA’s long-time IPR producer, observes that benchmarking should not lead to tunnel vision. “It is seldom possible to generate an adequate rate of return on net worth by emphasizing just one of the profitability paths. Each pathway should be examined carefully for improvement opportunities and then trade-offs made to increase overall profitability.

“An improvement plan should not be based upon any single measure of performance, but be developed with the complete picture in mind, i.e., the impact on return on net worth.”

Your IPR participation calculates these other ratios for your benchmarking:

  • EBITDA – Earnings Before Interest & Taxes
  • EBITDA to Total Assets – EBITDA divided by depreciation/amortization times 100 (%)
  • Capital Expenditures – As a percentage of sales
  • Debt to Equity – Total liabilities divided by net worth
  • Current Ratio – Assets divided by liabilities
  • Quick Ratio – Cash plus receivables divided by current liabilities
  • Debt to Equity – Total liabilities divided by net worth
  • Times Interest Earned – (Profit divided by interest) divided by interest

Benchmarking results provide the rationale and evidence you need to rationally shift or reduce resources. You can benchmark on your own with a few close industry contacts. It would help but the return on your effort won’t be as great as participating in the IPR, which is remarkably easy and effective in giving you feedback to improve your results. Not just a little. A lot.

How to Participate in the 2018 IP

Universal Unilink members: participate in the 2018 survey and get a FREE Financial Performance Report for easy benchmarking with other participants. Send an email to kkoepper@trsa.org indicating your interest and note your company is a Universal Unilink member. Or call (877) 770-9274 or (703) 519-9929, ext. 109.


Ken KoepperKen Koepper
Director of Marketing/PR
TRSA®  www.trsa.org

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