By Marty Kirshner, CPA, MSA, Gray, Gray & Gray, LLP
“Business intelligence” sounds like James Bond style, cloak-and-dagger corporate spying. The reality is a little more mundane, although no less thrilling if you are responsible for running a profitable fuel oil or propane business.
In the modern world, business intelligence is defined as “the strategies and technologies used for the analysis of data and information.” The world’s largest organizations use business intelligence to mine “big data” for trends and ideas that help guide and direct their business decisions on a real-time basis. Even more modestly sized companies can put data to use on a focused, localized level.
For fuel oil and propane companies, the most important data you can collect and put to use is information about your own business. You generate tons of data every day, from sales receipts to payroll reports, parts orders to vehicle repairs, facility rent checks to insurance premiums. Virtually everything connected with running your business has a number attached to it. When properly collected, sorted and analyzed, those numbers tell a story.
By tracking and measuring the most important numbers (known as key performance indicators, or KPIs), analyzing the data in terms of operational objectives, then applying what is learned, you can create a sharper picture of actual business conditions and use it to determine the best path forward. The secret is knowing which metrics are important to track for your business, being consistent in your measurement, and then having a process in place to turn information into action.
What to Track
Key performance indicators (KPIs) are not a new concept, and many energy companies have been measuring KPIs in their business for several years. If you are overwhelmed by the torrent of ratios and detailed comparative figures that your accountant unloads on you in their KPI report, you may not be focusing on the most important numbers. While every company is different and may need to track specific activities, there are some common KPIs that apply across almost all oil and propane companies.
Cost Per Delivery – According to our latest energy industry surveys, the average delivery of fuel oil is 160 gallons, while the average propane delivery is 144 gallons. But there are multiple steps in the process to get that fuel oil or propane delivered, and you should understand and track each part. Your overall cost per delivery is comprised of much more than simply the delivery driver’s hourly wages and cost of fuel. Factors like dispatcher salary, vehicle cost (insurance, fuel, repairs, depreciation), and overhead all must be considered when calculating your effective margin. (You can find a helpful fuel delivery cost calculator on our website: gggcpas.com/practice-areas/energy-petroleum/delivery-cost-calculator.)
Cost per Service Call – Similarly, the cost of each service call you make encompasses multiple factors that must be considered when calculating the true cost. Vehicle costs, insurance, inventory “creep,” replacement of parts used, technician’s salary and benefits, training: the list is long and may cause you to reconsider your service plan pricing! Many companies realize they could be losing money in their service department after running this analysis.
Break Even Gallon Analysis – Setting your margin per gallon of propane or fuel oil is a critical factor in whether or not you will make a profit during the heating season. But you cannot accurately set a margin unless and until you calculate the “break even” point you need to reach in order to cover your costs. This break even point shifts with rising and falling costs of fuel, payroll, overhead, equipment, and a thousand other considerations. You need to stay on top of this on a regular basis in order to set pricing properly. Don’t set your margin around the competition, set your margin based on what’s going to make you profitable.
Operating Expenses as a Percentage of Gross Profit – This calculation should be done on a regular basis not only for your overall company, but also for each profit center within your operation. Detecting an operating expense ratio that creeps up is an important way to identify a problem within a specific department or for the company as a whole. For example, maybe you notice your insurance cost continues to creep up and maybe it’s time to put it out to bid. The sooner you know about it, the quicker you can fix what’s wrong.
Owners’ Benefits – You should know how much you (and other owners) are taking out of the business on a per gallon basis. This includes salary, distributions, retirement benefits, bonuses and other benefits. This can help you make sure you do not take out so much that you put the business at risk; but it can also help ensure you are paying yourself enough, both right now and for the future.
How and When to Measure
Right now, you may only get to review your KPIs on an annual or quarterly basis. By then it may be too late to take advantage of opportunities — or fix problems — revealed by an analysis of the data collected. However, by using the advanced technology now available, you can track your most important numbers in real time. Our clients use a customizable “dashboard” tool to track a select list of KPIs on a daily basis, if they so choose. This gives them a competitive advantage by immediately providing the results of decisions they have made.
What to Do with the Data
The true value of business intelligence is turning data into action. A KPI report that sits on a shelf is useless. For example, what is the result of pushing the per gallon margin on fuel oil a few cents higher for will call customers? Will sales volume remain the same or drop off? Does the additional income generated justify a downturn in orders? This is something that can be tracked, measured, and adjusted “on the fly” to maximize profits.
Benchmarking is a way of tracking progress by comparing current data against previous data. A very simple example is measuring overall sales from this year against sales from previous years. But it is more helpful to benchmark specific data from KPIs that will give you a better idea of which areas of your business are improving, and which may require more work.
There are two types of benchmarking: internal and external. In internal benchmarking you compare your results with previous results from your own company. With external benchmarking, you compare your results with industry standards for similar companies, perhaps energy companies of a similar size or those doing business in the same region. Data from other companies can often be available through trade groups or state associations, or you can use the numbers generated by Gray, Gray & Gray’s annual energy surveys or the wide database of information we have readily available.
It is easy to glance at all the data available within your business and be overwhelmed to the point of paralysis. But it is important that you invest the time and money in creating a reporting and analysis system that gives you the information you need to make better business decisions, in a timely fashion.
Marty Kirshner, CPA, MSA is the chair of the Energy Practice Group at Gray, Gray & Gray Certified Public Accountants and specializes in accounting, tax, and consulting for energy company owners. You can reach Marty by calling (781) 407-0300 or at email@example.com.