8 minute read
for the Small Distributor
from REP April 2022
Are We Making Money Yet?
As a sales rep, you run your territory as your own business. But it’s part of something larger. The decisions you
make in the field – the number of calls you make, the sales you close, and yes, the prices or terms you negotiate – have an impact on the company at large.
A book by Albert D. Bates, “Profit Guide for the Small Distributor” (©2021, D.M. Kreg Publishing), looks at factors affecting the profitability of small distributors. Although intended for owners, it offers plenty for field reps to think about. Bates is principal in the Boulder, Colorado-based Distribution Performance Project, a research group dedicated to distribution issues.
Return on assets
The most basic questions for any business owner are: Where do we stand? Are we profitable today? Are we likely to be more profitable in five years – or less? Bates believes the answers lie in figuring out the company’s return on assets (ROA), that is, profit before taxes divided by total assets (e.g., cash on hand, accounts receivable, inventory and fixed assets).
He believes that in terms of ROA, distribution companies can be divided into three categories: ʯ Disasters (below 5% ROA). ʯ Soldiers (an ROA between 5% and 10% – where about 70% of distributors lie). ʯ Winners (10% ROA or higher).
For the Disasters and Soldiers, inadequate profits are bad enough. But there’s more. “Firms that don’t produce strong profits can’t be sold in the future for anything other than fire-sale prices,” he says. “At retirement time there is no residual value to the business.”
The good news is, anyone can be a Winner by putting programs and practices in place that ensure profits today and tomorrow, he says. Nor must those changes be drastic. Slow and steady is better. “Winners inevitably produce two, three or even four times the profit of the Soldiers, even on the same sales volume.”
Critical Profit Variables
Bates believes that of all the things they can worry about, distributors should stay focused on five “Critical Profit Variables” – net sales, gross margin, total expenses, accounts receivable and inventory. They’re all related, as adjusting one inevitably affects the others. But in the author’s opinion, keeping a sharp eye on just three – net sales, gross margin and total expenses – can keep the company moving in the right direction. While important, accounts receivable and inventory have a much more modest impact on profit than the other three, he says. The critical variables are: ʯ Net sales: Total revenue generated by the firm. Even a very small sales increase will generate higher profit.
ʯ Gross margin: The dollars of gross profit produced by sales, expressed either in dollars or as a percentage, that is, gross margin dollars divided by net sales. (Of the two – dollars or percentage – the latter is more precise.)
ʯ Total expenses: Payroll represents about twothirds of the typical distributor’s expenses. “This means that controlling – not necessarily lowering – payroll is essential,” he says. In other words, reducing head count is less effective than improving the productivity of people already onboard.
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ʯ Accounts receivable: Bates says it’s a myth that this number should always be lowered.
ʯ Inventory: Although the value of merchandise in the facility is important, even more important is ensuring that the inventory there is fresh and salable.
What about sales?
Sales don’t have to increase rapidly in order for the small distributor to increase profit appreciably. Rather, distributors should think in terms of something close to inflation rate plus 3%. So, when inflation is averaging 2%, a worthy goal would be 5% growth every year. “As long as sales are growing by 5% [in this example], the non-payroll expenses will more or less take care of themselves,” says Bates. “The challenge arises in matching up the growth in sales with the growth in payroll expenses.” He refers to that as “real sales gain,” that is, the percentage by which the growth in sales exceeds that of payroll expenses. time to recruit with the rigor of large firms,” he says. On top of that, sales training in small firms may be haphazard or even nonexistent. “Too much to do in too many ways.” Owners of small distributors wrestle with another, less tangible, factor: They may resist firing a salesperson who’s been with the company for years but whose sales are falling short (compared to the territory’s potential, as determined by the owner or sales manager). But again, firing people is often less effective than improving the productivity of the reps on the team.
Price cutting
Assuming the distributor has made the correct hiring decisions, owners need to stay in touch with what’s happening in the field. Price cutting is an example. “Cutting price becomes the fallback option when customers register any concern about anything,” he says. “Over time customers become acutely aware that the price cutting option is always on the table. The
one-time cut becomes the ‘any time and all-the-time’ cut.”
In what he calls the “normal commission plan,” the rep’s commission rate stays at the same percentage of gross margin dollars regardless of whether sales – in terms of dollars – rise or fall. In a sliding plan, however, the commission rate falls along with the company’s profit margin. In that case,
Distributors have two options to maintain or increase real sales gain: 1) change order economics, such as lines per order, fill rate, or average order line value, or 2) “control” the sales force. (Bates’ term, not ours.)
Controlling the sales force begins with successful recruiting and hiring, both of which are real challenges for small companies. “[They] seldom [have] the the rep stands to lose a chunk of compensation if sales drop, but the company maintains a decent level of profitability. Not great news for the rep, but tolerable for the company.
Planning
People resist planning, including small-business owners. There are too many other things they’d rather be doing. Yet it is an essential part of the job for the owner, and it will have an impact on reps in the field.
One approach to planning is the “what-if” method, in which the owner considers a series of changes which they think are genuinely attainable, then figure out their impact on profit. But Bates believes this approach is limited. “With that approach, managers simply diddle around until they get a plan they kind of like. That plan may or may not result in the improvement in profit that is required.”
He prefers a more rigorous approach, which he calls “profitfirst” planning, in which the owner sets company profit goals and then works backward to establish targets for sales gross margin and expenses. “Only about one company out of every 50 that considers the concept of profit-first planning ends up using it,” he says. “That small group has one common characteristic: They all generate a lot more profit than the other 49.”
Planning is only as good as follow-through, he adds, referencing the oft-cited Mike Tyson quote, “Everybody has a plan until they get punched in the mouth.”
“It doesn’t take too long to get off plan. When this happens, a lot of owners just forget the plan. Resist that temptation. It is actually a good time to dig into things and see what is happening financially.”
A CLOSER LOOK AT AFINION™ 2 ANALYZER
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NO MAINTENANCE
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1. Nathan DM, Griffin A, Perez FM, et al. Accuracy of a Point-of-Care Hemoglobin A1c Assay. J Diabetes Sci Technol. 2019;13(6):1149-1153. https://journals.sagepub.com/doi/abs/10.1177/1932296819836101. 2. Arnold WD, Kupfer K, Little RR, et al. Accuracy and Precision of a Point-of-Care HbA1c Test. J Diabetes Sci Technol. March 10, 2019. https://journals.sagepub.com/doi/pdf/10.1177/1932296819831292. 3. Arnold WD, Kupfer K, Swensen MH, et al. Fingerstick Precision and Total Error of a Point-of-Care HbA1c Test. J Diabetes Sci Technol. March 6, 2019. https://journals.sagepub.com/doi/ pdf/10.1177/1932296819831273. 4. Lenters-Westra E, English E. Evaluation of Four HbA1c Point-of-Care Devices Using International Quality Targets: Are They Fit for the Purpose? J Diabetes Sci Technol. 2018;12(4):762-770. https://journals.sagepub.com/doi/pdf/10.1177/1932296818785612. 5. Sobolesky PM, Smith BE, Saenger AK, et al. Multicenter assessment of a hemoglobin A1c point-of-care device for diagnosis of diabetes mellitus. Clin Biochem. 2018;61(4):18-22. https://www.sciencedirect.com/journal/clinical-biochemistry/vol/61/suppl/C. © 2020 Abbott. All rights reserved. All trademarks referenced are trademarks of either the Abbott group of companies or their respective owners. Any photos displayed are for illustrative purposes only. 10005910-01 08/20
