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Developing Key Performance Metrics for the CEO

By AICC Staff

May 27, 2016

I get asked about key performance indicators (KPIs) on a fairly regular basis, and it is usually in the context of “please print me out a list KPIs for the converting business.” When I say this requires a little homework, I often get strange looks. I mean, how tough is it to compare sales and margins and that kind of stuff, anyway? As in most things, the devil is always in the details, isn’t it?

I’ve spent a lot of time in the pages of BoxScore and in my travels talking about how all sales are not equal and how, although most of you convert paper into packaging, there are many variations in how this is done—using different machinery and methodology. To simply print out a bunch of sales, margin, labor, and plant statistics and call them KPIs just doesn’t get it done for me. So, what’s a converter to do?

I have decided to come up with a top 10 list of things to do to develop a system of key performance metrics (KPMs) that will help you keep your finger on the pulse of your business. They are as follows:

  • Keep your buckets pure.
  • Know your number.
  • Keep track of time.
  • Learn to be a profit predictor.
  • Take steps to unbundle the sale.
  • Understand the difference between a profit center and a cost center.
  • Be open to alternative reporting systems.
  • Keep it simple and concise.
  • Measure the same things the same way every day.
  • Incorporate all of the measurements into your regular reporting system.

I will delve into each with more detail in future of BoxScore, but for now, let’s discuss the first two.

Keeping Your Buckets Pure

All of you are in a number of different businesses. Almost all of you have machine-intensive operations, labor-­intensive operations, and brokerage operations. If you are going to understand the key profitability drivers of your business, you must, at a minimum, break your operations down into three buckets of revenue and costs. Within these areas, there may be other separate functions.

For instance, your manufacturing operations may include elements of corrugated, chipboard, foam, wood, single-face, and labels. Your labor-intensive work may include gluing, assembling, and packing, and you may broker both corrugated and noncorrugated products.

The most important thing you can do to understand the profitability of your company’s various businesses is to keep all of these buckets as pure as you can. A little bit of care and due process when purchasing items and booking orders will go a long way toward helping you make sense of your financial results. If you are able to organize your books and records to accommodate the various businesses and business segments that you are in, you will be more than halfway to the promised land of creating key performance metrics.

Knowing Your Number

I write and lecture extensively on the importance of calculating contribution

in a manner that treats variable costs as the incremental costs to the organization of accepting an order. It shouldn’t include any allocation of costs that the organization will incur whether or not they accept a particular order. If you can set up your systems in that fashion— i.e., don’t commingle the fixed and variable cost buckets—then your “number” is simply the sum of all of the fixed costs. This is possibly the most important number of all, because it lets you know what the dollar figure of contribution is that you must generate each day to break even.

So, instead of looking at how many sales dollars you booked or how many square feet you shipped, you can simply look at how many contribution dollars you booked or shipped in comparison to your number and instantly know whether or not you made money.

If you have your business segment buckets pure, and your fixed and variable cost buckets pure, then you can start to look at contribution by business segment as well. You can start to look at the contribution generated by each business segment as compared to the fixed costs associated with operating that segment. At the end of the day, you will have a much better idea of where the profits are coming from.


MitchellMitch Klingher is a partner of Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@klinghernadler.com.