Study: Middle-market companies need more sophisticated financial measurements

Despite the existence of sophisticated tools for evaluating financial performance, middle-market companies tend to stick to basic financial measurements, especially profit margins. That was one of the key findings in research conducted by the Council of Supply Chain Management Professionals (CSCMP) and the National Center for the Middle Market, a research center at The Ohio State University's Fisher College of Business. Middle market companies were defined as businesses with annual revenues between $10 million and $1 billion.

The survey canvassed 200 respondents about their use of margin management metrics and analytics, the value of those tools, and the impediments to managing margins. Survey participants were strategic and financial decision makers along the length of the middle market supply chain—raw-material suppliers, manufacturers, wholesalers/distributors, retailers, and service providers.

The study found that most firms continue to rely on basic measures to gain insight into the revenues generated by demand for their products and services and the costs associated with providing them. The most commonly used metric, cited by 96 percent of respondents, was the profit margin. The second most common metric was operating margin or return on sales, named by 82 percent of survey respondents. Last on most respondents' lists was cost to serve, cited by only 14 percent.

Given the complexity of today's supply chains, the report said, companies should consider using additional metrics to identify where money is earned and lost over the course of conducting business with diverse customers, products, and services. "Using cost-to-serve models, activity-based costing, and balanced scorecards are all very helpful in understanding where money is being spent and what the implications are on margins," the report concluded. "We encourage managers to look into using these more sophisticated tools—we believe they will make a significant difference in how effectively they manage margins."