Profit Velocity—the Missing Metric

Have you found the missing metric? As CFO you probably feel you have all the metrics you need and more but one is missing.

For Google Analytics, the missing metric is $ Index, described as the fastest way to figure out how each of your web pages contributes to your total revenue. It takes your total revenue, analyzes the pages that visitors went through before they converted, and weights them so you can see which ones are the most valuable. For sure that is a valuable metric for your CMO but that’s not the missing metric wiredFINANCE is talking about.

Especially if you are a manufacturer there is a more important metric, profit velocity. As Profit Velocity Solutions explains: All manufacturers worldwide carefully measure and manage the profit per unit of their products, but very few manufacturers have any idea how much profit per hour their equipment produces. That is why it’s called the missing metric; until recently, there simply hasn’t been a tool capable of measuring it. But now there is. 

The tool, PV Accelerator, enables manufacturers to identify and analyze how much profit per hour their machines yield as various products flow through them so they can optimize profits on the fly. In this case, time truly is money.

Why so important? One word: ROA. CEOs and CFOs are largely rated by their ability to wring profits from the assets under their control. As such, ROA is perhaps the premier metric of quarterly and annual results. But how many manufacturing firms are able to measure and report on ROA at the transactional level of detail? How many can provide their middle-management ranks with accurate, timely, detailed reporting of ROA by invoice line item, production run, customer order, production line, etc.? Virtually none, notes Michael Rothschild, founder and chairman of Profit Velocity Solutions. Yet, not measuring profit velocity allows misguided management decisions, which by some estimates, are causing $100 billion per year in global manufacturing profits to be frittered away.

That’s why this metric has been so sorely missed. “The problem is that accounting systems are designed to measure unit margins, and until a few years ago the raw data required to accurately calculate the profit velocity of production assets was neither captured nor stored in databases,” explains Rothschild. Until his company introduced, PV Accelerator, no information platform existed that could weave together the necessary raw data to calculate and report on the missing metric.

“Despite decades of massive investment in sophisticated information systems,” Rothschild continues, “when it comes to the management accounting challenges facing managers of complex, asset- intensive manufacturing enterprises, an enormous gap remains between management’s need for actionable, profit-optimizing information and the capabilities of today’s systems.”

PV Accelerator, however, gives manufacturers visibility into asset return—not just per product unit, but per asset hour—and it does it for every product, customer, and machine on every production line at every facility. Without it you would need battalions of accountants armed with spreadsheets to even attempt this. The results, if any ever arrived, would be too late to be useful.

The challenge becomes getting the right numbers fast enough and in a form that can be effectively used.

In today’s world, businesses meticulously track so many metrics, yet ironically the metric that matters most, how fast you’re making money from your assets, is the one metric managers are missing. With PV Accelerator you get exactly the information you need in near real-time and in a form you can put right to work.

For example, a sales rep sitting in Starbucks with an iPad preparing for his next call can access the tool to determine which product he should offer right then to maximize both his commission and profit for the company. Near real-time profit velocity data like this is tantamount to information-based decision making on steroids. And once the system is in place, everybody can take advantage of it, from the sales rep in the field to the operations director to the CFO and CEO.

Rest assured the IT team will have no problem; PV Accelerator, a cloud-based SaaS offering, runs as just another virtual machine on your network. After a quick mapping exercise, it will start collecting a blend of historical and current data and begin analyzing it. Results show up fast. The CIO will love it because it leverages the IT investment in a clean simple way that has the potential to deliver a clear payback, adding points, not just fractions of a point, to the company’s bottom line, which will please the CFO too.

Author: Alan Radding -  Web: http://technologywriter.com/about-tw/