You’re skilled at keeping simultaneous track of your company’s profits and costs, including business operating expenses. Case in point: You can probably calculate your gross profit – revenue subtracted by the cost of goods sold – with little effort.
But with economists predicting an economic slowdown of some kind this year, you’re probably keeping a watchful eye on business operating expenses and considering ways to control those costs. The KPIs you’ll need to monitor will be more than just gross profit, average margins and ROI, however.
Follow these business operating expense indicators
They may not be the sexiest KPIs, but ignoring them could end up costing you money.
Inventory levels: Remember the COVID-related supply chain problems from last year? Not being able to meet market demand drives customers and revenue elsewhere. Another impact from having too little inventory is higher costs. For example, buying small amounts of inventory means losing out on volume discounts from suppliers.
But having too much inventory also has a negative impact on business operating expenses. Funds wastefully spent on excess inventory can’t be recouped and reassigned. And as a result, there could be extra costs for storage and possible loss of value (and demand) if items are time-sensitive or are outmoded by newer versions.
A benchmark worth striving for is directly linking inventory to sales levels and sales forecasts. So a forecasted 10% increase in sales needs to be supported by a 10% inventory growth.
Overall labor effectiveness: Because of how big of a chunk payroll takes out of business operating expenses, workforce optimization can be informed by measuring performance and utilization. Depending on your industry and the department you’re evaluating, performance can be measured as a percentage of actual production divided by target production. To calculate utilization, take the amount of employee standard hours and divide it by their total productive hours.
Although quality of work is subjective, it’s something else that can be considered. For example, what percentage of your total product is sellable?
Cost variance: You know from experience that the budget figure you assign often isn’t the final figure as major projects come in over or under budget. But just how much under or over budget are you?
By measuring the difference between what your original forecast/planned budget was and the actual final costs, and then tallying up the number of projects on budget/under budget vs. over budget, you can find out how financially accountable your people are.
