Profit Is Everybody s Business

Transcription

1 Profit Is Everybody s Business A Member Service From How to Drive Higher Profits, Provide Better Salaries and Fringes, Smile More, and Have Your Work be Really Meaningful Presented by Dr. Albert D Bates

2 Session One: How Are We Doing?

3 Exhibit 1 Key Financial Results: The Typical Firm in the Industry Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, % Accounts Receivable $600,000 Inventory $1,200,000

4 Exhibit 2 The Three Profit Pressure Points 1. Sales Growth Ability to grow faster than the overall market 2. Gross Margin Percentage Ability to buy effectively and get paid for services provided a. Buying Prices b. Selling Prices 3. Expense Percentage Ability to operate in a productive manner while still compensating employees in line with their efforts

5 Exhibit 3 Economics of Improving Profit Result How They Do It Important Note Generate somewhere around three times the profit of the typical firm in every industry Doing just a little better on the three factors identified in Exhibit 2 Sales Growth, Gross Margin Percentage and Expense Percentage High profit doesn't mean bigger, just slightly better

6 Exhibit 4 A Mantra to Remember Little Things Mean a Lot Crank the sales a little bitty bit Just a smidgen more gross margin Watch those expenses

7 Session Two: What are the CPVs?

8 Exhibit 5 A Reminder About the Typical Company Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, % Accounts Receivable $600,000 Inventory $1,200,000

9 Exhibit 6 A New Expense Concept Fixed Expenses Tend to stay the same until $1,550,000 somebody takes action Variable Expenses Tend to change automatically 5.0% when sales change of Sales or $300,000

10 Exhibit 7 The Impact of Doing 1% Better on the Critical Profit Variables The Three CPVs Four Action Points The Impact on Dollar Profits of of a 1.0% Improvement 1. Gross Margin Two Actions a. Selling Prices 38.0 % b. Buying Prices Net Sales Total Expenses 12.3

11 Exhibit 8 The Impact of the Gross Margin Actions Making Changes From Current Performance Lowering Raising Cost of Goods Sales With With Better Higher Current Buying Prices Net Sales $6,000,000 $6,000,000 $6,060,000 Cost of Goods Sold 4,000,000 3,960,000 4,000,000 Gross Margin 2,000,000 2,040,000 2,060,000 Expenses Fixed Expenses 1,550,000 1,550,000 1,550,000 Variable Expenses (5% of Sales) 300, , ,000 Total Expenses 1,850,000 1,850,000 1,853,000 Profit Before Taxes $150,000 $190, ,000 Increase in Profit $ $40,000 $57,000 Increase in Profit % 26.7% 38.0%

12 Exhibit 9 The Impact of the Sales and Expense Actions Sell More Lower Current Merchandise Expenses Net Sales $6,000,000 $6,060,000 $6,000,000 Cost of Goods Sold 4,000,000 4,040,000 4,000,000 Gross Margin 2,000,000 2,020,000 2,000,000 Expenses Fixed Expenses 1,550,000 1,550,000 1,534,500 Variable Expenses 300, , ,000 Total Expenses 1,850,000 1,853,000 1,831,500 Profit Before Taxes $150,000 $167,000 $168,500 Increase in Profit $ $17,000 $18,500 Increase in Profit % 11.3% 12.3%

13 Session Three: Cost of Good Not Sold

14 Exhibit 10 A Reminder About the Sample Company Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, % Accounts Receivable $600,000 Inventory $1,200,000

15 Exhibit 11 The Impact of Missing Some Potential Sales 5.0% Sales Current Not Made Net Sales $6,000,000 $5,700,000 Cost of Goods Sold 4,000,000 3,800,000 Gross Margin 2,000,000 1,900,000 Expenses Fixed Expenses 1,550,000 1,550,000 Variable Expenses (5% of Sales) 300, ,000 Total Expenses 1,850,000 1,835,000 Profit Before Taxes $150,000 $65,000 Decrease in Profit $ $85,000 Decrease in Sales % 5.0% Decrease in Profit % 56.7% Volume Sensitivity: Sales Change Versus the Profit Change

16 Exhibit 12 The Driver of Sales Maximization Current Potential 1. Customer Orders 24,000 24, Lines per Order Lines Ordered [ 1 x 2 ] 50,526 52, Fill Rate (Service Level) 95.0% 96.0% 5. Lines Filled [ 3 x 4 ] 48,000 50, Average Line Value $ $ Sales Generated [ 5 x 6 ] $6,000,000 $6,414,669 Increase in Sales 6.9%

17 Exhibit 13 The Areas of Emphasis in Growing Sales Sales Driver Lines per Order Add-on selling Breadth of assortment one-stop shopping Customer Awareness of the Assortment Fill Rate In-stock on key items at all times Average Line Value Good/Better/Best selling Selectively raise prices Adding New Customers Continual effort

18 Session Four: The Sales to Payroll Wedge

19 Exhibit 14 The Sample Company One More Time Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, %

20 Exhibit 15 The Sales to Payroll Wedge The Key Concept Control payroll costs so they increase two percent less than the increase in sales Supporting Concepts Sales growth is key to increasing profits Expense control is also key Employees are the way the company provides its services, and effective employees deserve increases in pay Some Changes That Will All Drive Higher Profits Sales Payroll Sales to Increase Increase Payroll (Sales Growth) (Payroll Growth) Wedge 15.0% 13.0% 2.0% 10.0% 8.0% 2.0% 5.0% 3.0% 2.0%

21 Exhibit 16 Two Sales Increase Scenarios 5.0% Increase in Sales Payroll Payroll Current Up 3.0% Up 7.0% Net Sales $6,000,000 $6,300,000 $6,300,000 Cost of Goods Sold 4,000,000 4,200,000 4,200,000 Gross Margin 2,000,000 2,100,000 2,100,000 Expenses Payroll and Fringe Benefits 1,250,000 1,287,500 1,337,500 All Other Expenses 600, , ,000 Total Expenses 1,850,000 1,917,500 1,967,500 Profit Before Taxes $150,000 $182,500 $132,500

22 Exhibit 17 A Reminder About Order Economics ** Raise the Average Line Value The only increase in payroll costs would be comissions It is the exact same amount of work being done * More Lines on Every Order Increases payroll costs slightly as more items have to be picked, inspected and ultimately, re-ordered from suppliers However, sales should increase more than payroll costs

23 Exhibit 18 Some Other Ways to Control Payroll Costs Identify and Work With Problem Customers Some customers are extremely expensive to service properly Rethink their cost impact Do they buy too often in very small quantities? Do they have lots of returns? Are they excessive on emergency orders? If costs can't be controlled, adjust prices Review the Service Profile Some services provided are essential Some services may not have any real value

24 Session Five: Trying to Make it up With Volume

25 Exhibit 19 You Guessed It The Sample Company Again Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Fixed Expenses 1,550, Variable Expenses (5% of Sales) 300, Total Expenses 1,850, Profit Before Taxes $150, %

26 Exhibit 20 Let s Cut Our Prices Current New Percent Price Price Change Average Transaction (Order) $ $ % Supplier Cost per Transaction (Order) $ $ Gross Margin Per Transaction (Order) $83.33 $ Gross Margin Percentage 33.3% 29.8%

27 Exhibit 21 What Happens If We Do Cut Price? 5.0% Percent Current Price Cut Change Average Transaction (Order) $ $ % Cost of Goods per Transaction (Order) $ $ Number of Customer Transactions 24,000 24, Net Sales $6,000,000 $5,700, % Cost of Goods Sold 4,000,000 4,000, Gross Margin 2,000,000 1,700, Expenses Fixed Expenses 1,550,000 1,550, Variable Expenses (5% of Sales) 300, , Total Expenses 1,850,000 1,835, Profit Before Taxes $150,000 -$135,

28 Exhibit 22 The Sales Increase Required to Offset The Price Cut 5.0% Percent Current Price Cut Change Average Transaction (Order) $ $ % Cost of Goods per Transaction (Order) $ $ Number of Customer Transactions 24,000 28, Net Sales $6,000,000 $6,848, Cost of Goods Sold 4,000,000 4,805, Gross Margin 2,000,000 2,042, Expenses Fixed Expenses 1,550,000 1,550, Variable Expenses (5% of Sales) 300, , Total Expenses 1,850,000 1,892, Profit Before Taxes $150,000 $150,

29 Exhibit 23 Things Really Can Get Even Worse Sales Required Percentage To Offset Increase Original Sales Level Price Cut The Price Cut In Sales $6,000, % $6,000, % $6,000, ,848, $6,000, ,291, $6,000, ,819, $6,000, ,460, $6,000, ,253,

30 Session Six: Increasing Gross Margin

31 Exhibit 24 We Are All Getting Tired of the Sample Company Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Fixed Expenses 1,550, Variable Expenses (5% of Sales) 300, Total Expenses 1,850, Profit Before Taxes $150, %

32 Exhibit 25 Adding a Half Point to Gross Margin by Either buying Low or Selling High Buying Selling Dollars Current Low High Net Sales $6,000,000 $6,000,000 $6,045,340 Cost of Goods Sold 4,000,000 3,970,000 4,000,000 Gross Margin 2,000,000 2,030,000 2,045,340 Expenses Fixed Expenses 1,550,000 1,550,000 1,550,000 Variable Expenses (5% of Sales) 300, , ,267 Total Expenses 1,850,000 1,850,000 1,852,267 Profit Before Taxes $150,000 $180,000 $193,073 Percent of Sales Net Sales % % % Cost of Goods Sold Gross Margin Expenses Fixed Expenses Variable Expenses (5% of Sales) Total Expenses Profit Before Taxes 2.5 % 3.0 % 3.2 %

33 Exhibit 26 The Profit challenges Associated With Buying Low and Then Selling Low Buying Low Buying and Then Current Low Selling Low Net Sales $6,000,000 $6,000,000 $5,955,000 Cost of Goods Sold 4,000,000 3,970,000 3,970,000 Gross Margin 2,000,000 2,030,000 1,985,000 Expenses Fixed Expenses 1,550,000 1,550,000 1,550,000 Variable Expenses (5% of Sales) 300, , ,750 Total Expenses 1,850,000 1,850,000 1,847,750 Profit Before Taxes $150,000 $180,000 $137,250 Reduction in COGS from Buying Low 0.750% 0.750% Reduction in Sales from Selling Low 0.000% 0.750%

34 Exhibit 27 The Impact of a 5.0% Supplier Price Increase: Passing it Along or Absorbing Some of the Increase Dollar for Percent for Current Dollar Percent Net Sales $6,000,000 $6,200,000 $6,300,000 Cost of Goods Sold 4,000,000 4,200,000 4,200,000 Gross Margin 2,000,000 2,000,000 2,100,000 Expenses Fixed Expenses 1,550,000 1,550,000 1,550,000 Variable Expenses (5% of Sales) 300, , ,000 Total Expenses 1,850,000 1,860,000 1,865,000 Profit Before Taxes $150,000 $140,000 $235,000

35 Exhibit 28 Three Important Conclusions About Gross Margin Pricing Versus Buying Buying Better Supplier Price Increases Raising prices is more powerful than buying better, even at the same gross margin percentage Do not decide that buying better is an opportunity to lower prices Pass them along percent for percent

36 Session Seven: Pricing For Profit

37 Exhibit 29 You Already Knew Where We Would Start The Sample Company Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, %

38 Exhibit 30 The Different Types of Items in the Assortment Item Category Percent (Velocity Code) of Sales Pricing Reality A: Commodities 60.0 % If you are high on these, you are saying you are high on everything B: Basics 20.0 Probably about the same gross margin percent as the total firm C: Slow Sellers 15.0 Bought infrequently so a possible opportunity to get more margin D: Really Slow Sellers 5.0 Bought only when absolutely needed the big opportunity Total %

39 Exhibit 31 Stretching the Price Matrix Gross Gross Margin Margin Current Performance Sales Dollars Percentage A: Commodities (60% of Sales) $3,600,000 $1,008, % B: Basics (20%) 1,200, , C: Slow Sellers (15%) 900, , D: Really Slow Sellers (5%) 300, , Total $6,000,000 $2,000, Gross Gross Margin Margin A 10% Price Increase on D Items Sales Dollars Percentage A: Commodities (60% of Sales) $3,600,000 $1,008, % B: Basics (20%) 1,200, , C: Slow Sellers (15%) 900, , D: Really Slow Sellers (5%) 330, , Total $6,030,000 $2,030,

40 Exhibit 32 Common Characteristics of Blind Items Low Sales Level Not Heavily Promoted Bought Only When Needed Low Price Repair Parts Unusual Non-Seasonal Unbranded Items tend to be bought infrequently An absence of on-going price information Availability outweighs price On a $2.00 item, price is inconsequential Paying $20 to repair a $10,000 piece of equipment Only a few firms actually carry the item No peak demand to spur price sensitivity Limited ability to price shop

41 Session Eight: The Dual Challenge with Inventory

42 Exhibit 33 The Sample Company, But a New Emphasis Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, % Inventory $1,200,000 Cash $1,250,000

43 Exhibit 34 The Two Challenges in Improving Inventory Performance Measurement Tool Ease of Measurement Cost of Not Performing Implication for the Firm Meeting Customer Needs for Merchandise at all Times Service Level Difficult Lost Customers More Inventory Financing Growth to Avoid Running out of Cash How Much Inventory Easy Run out of Cash Less Inventory

44 Exhibit 35 The Profit and Cash Implications of Less Inventory Calculation Amount 1. Current Inventory $1,200, Reduction in Inventory % 10.0% 3. Reduction in Inventory $ [ 1 x 2 ] $120, Original Cash $1,250, New Cash [ ] $1,370, Inventory Carrying Cost (ICC)* 12.0% 7. Increase in Profit [ 3 x 6 ] $14,400 A Comparison: Profit decrease from a 5.0% sales decrease $85,000 (See Exhibit 11) *The Inventory Carrying Cost includes interest, obsolescence, shrinkage and all other costs associated with having inventory.

45 Exhibit 36 Trying to Have Your Cake and Eat It Too Percent of Item Category Percent Percent Inventory (Velocity Code) of Items of Sales Investment A: Commodities 10.0 % 60.0 % 40.0 % B: Basics C: Slow Sellers D: Really Slow Sellers Total % % %

46 Session Nine: The Hated Accounts Receivable

47 Exhibit 37 Almost Done With the Sample Company Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, % Accounts Receivable $600,000 Cash $1,250,000

48 Exhibit 38 Why Accounts Receivable is Highly Emotional The Underlying Issue They have our money It Can Only Get Worse The jerks stiffed us However, they buy from us because we extend them credit.

49 Exhibit 39 The Profit and Cash Implications of Less Accounts Receivable Calculation Amount 1. Current Accounts Receivable $600, Reduction in Accounts Receivable % 10.0% 3. Reduction in A/R $ [ 1 x 2 ] $60, Original Cash $1,250, New Cash [ ] $1,310, A/R Carrying Cost (ARCC)* 8.0% 7. Increase in Profit [ 3 x 6 ] $4,800 A Comparison: Profit decrease from a 5.0% sales decrease $85,000 (See Exhibit 11) *The Accounts Receivable Carrying Cost includes interest, bad debts and the cost of hounding customers who are past due.

50 Exhibit 40 A Summary of the Key Points from Sessions One Through Nine For most distributors profit is adequate but not what it could be The key to improvement is to focus on the CPVs sales, gross margin and payroll Sales needs to grow faster than payroll Generating the sales to payroll wedge requires working on order economics the number of lines per order, the fill rate and the average line value It is almost impossible to make it up with volume Buying and pricing need to be two distinct operations Price increases should be passed along percent for percent There are numerous opportunities to increase prices on D items Changes in both inventory and accounts receivable have a large impact on cash, but a much smaller one on profit Concerted effort will lead to higher profits as well as better salaries and bonuses

51 Session Ten: Little Things Mean A Lot

52 Exhibit 41 It s Kind of Sad Our Last Look at the Sample Company Percent Dollars of Sales Net Sales $6,000, % Cost of Goods Sold 4,000, Gross Margin 2,000, Expenses Payroll and Fringe Benefits 1,250, All Other Expenses 600, Total Expenses 1,850, Profit Before Taxes $150, %

53 Exhibit 42 A Potential Profit Plan: One of Many Sales Increase 5.0 % Gross Margin Increase 7.0 Payroll Increase 3.0 Other Expense Increase 2.0

54 Exhibit 43 Little Things Mean a Lot Percent Dollars Current Potential Change Net Sales $6,000,000 $6,300, % Cost of Goods Sold 4,000,000 4,160, Gross Margin 2,000,000 2,140, Expenses Payroll and Fringe Benefits 1,250,000 1,287, All Other Expenses 600, , Total Expenses 1,850,000 1,899, Profit Before Taxes $150,000 $240, Percent of Sales Net Sales % % Cost of Goods Sold Gross Margin Expenses Payroll and Fringe Benefits All Other Expenses Total Expenses Profit Before Taxes 2.5 % 3.8 %

55 Who Is This Guy? Dr. Albert Bates is founder and President of the Profit Planning Group. His company prepares financial benchmarking surveys for most of the major lines of trade in distribution. Prior to starting the Profit Planning Group, Al was a member of the faculty of the University of Colorado. He also served as a Vice-President of Management Horizons, a leading distribution consulting firm until he left. Al received his doctorate from Indiana University. While there he was one of the first recipients of the Ford Foundation Fellowships in Business Education. He is married and has three grown daughters who have all fled to Europe to get as far away from him as they can. All four of the ladies in his life have black belts in Tae Kwon Do. Criticize this video program at your own risk. What If You Really Want to Know More About Profit? Al is the author of Breaking Down the Profit Barriers in Distribution. It is a book that every manager in distribution should read. It is available from both Amazon and Barnes & Noble. Sorry, but because of the technical nature of the material it is not available in ebook format.