Issue link: http://www.e-digitaleditions.com/i/128820
Getting into continued you will really get their attention. Holding the remaining one-fourth of the bill, explain that this represents gross margin. At this point, I ask the group if the owner of the company gets to put the gross margin in their back pocket at the end of the month. I usually see a shaking of the heads, but I would bet that there are a few that might believe this to be true. Sad but true, many people that work with you and for you believe that the owner pockets the gross margin dollars every month. Obviously, this isn't the case. I then start asking about the expenses that come out of the gross margin before it becomes net profit.While they list off some items (wages, benefits, rent, utilities, etc), I am consistently ripping off bits of the bill and dropping it on the floor. I also make comments on each of the expense items and help them come up with a few they might have overlooked. Ultimately, you wind up with a very small chunk representing net profit. This leads to a discussion of the importance of gross and net profit. This demonstration is a great way to start changing the mindset. Once the team understood how the income flowed, we talked about the income statement.We talked about how a slight improvement in gross margin would really change the net profit picture in the company. The next step in changing the mindset was to create gross profit goals in the company. We started with the least profitable location and developed a daily gross margin goal based on the current expenses for the location.We bumped it up a bit in order to foster some downstream profitability. By creating a daily gross margin goal,we provide a constant reminder of what we want to accomplish. In this case, we came up with a goal and then created a simple feedback method designed to show the location how they were doing. Each day, the branch manager reviews the sales report from the previous day and writes the gross margin dollar total for the day on a wall calendar in his office. For those of you beginning to twitch in your seats, the number has no dollar designation or decimal points. In order 28 FEDA New s & View s A gross margin mentality can also have an effect on your accounts receivable performance. I was recently discussing the benefits of moving to a gross margin focus with a different client of mine. to tie the number in with our goal, it is either written in black pen (for gross margin dollars exceeding the goal) or red pen (for gross margin dollars below goal). The calendar is visible to the employees because you have to walk through the manager's office to get to the refrigerator. It doesn't get much simpler than this. Sales Compensation Reinforcement One of the ways to make sure that we are driving a gross margin mentality is to insure that the sales compensation methodology supports our efforts.What are you basing sales compensation on? If the commission is a percentage of gross sales dollars, you are going to have a difficult time changing the mentality. Although many of you have created compensation plans based on gross margin,there are still a few hold outs. I often see this in companies where cost is not shared with the sales team. This type of scheme can also be found in companies where deviation from established sales pricing is rare or non-existent. I hate to say it, but both of these scenarios lead me to believe that there are some real control issues in the executive team. When you don't empower your people to do their job, your potential is severely retarded. When we put an emphasis on gross margin with our sales team, there may be a shift in product focus. Hopefully,we will see a greater interest in higher-profit products. Even when a low-profit product is sold, there will be more incentive to round out the sale with complimentary high-margin products.A swift way to emphasize margin importance is to modify sales compensation. I recently had the opportunity to meet the CEO of Fastenal, Will Oberton. For those of you unfamiliar with the company,they are a multibillion dollar industrial fastener and supply distributor boasting more than 20 percent net profit before taxes. In the words of my father, that's some pretty tall cotton. He was speaking at an event that I was involved with and I sat in on his presentation. He spoke about a bold program that he recently instituted with their sales compensation. Essentially, if a sales order posted less than 20 percent gross margin, the order was not eligible for commission. As you can probably imagine, this caused a huge ruckus in the sales department. Some of his regional managers were very vocal in their opposition. Oberton held his ground. He stated,"If the company can't make money on the sale,why am I going to pay the salesperson?" The results worked in his favor. By the end of the year, their overall margins had improved and some one of the most vocal opponents said that it was the best thing they had done in years. A gross margin mentality can also have an effect on your accounts receivable performance. I was recently discussing the benefits of moving to a gross margin focus with a different client of mine. He is in the plywood and shop supply business. There had been some recent focus on driving the sheet goods product category in order to boost sales. This is a high-sales-dollar, low-margin category. In the past, the perceived performance of the company was tied to top-line sales. He pointed out that this mentality was really making collections difficult. He explained that a $2,000 sheet goods sale might generate $140 in gross margin, while a $300 sandpaper order might generate that same $140 in gross margin. When it is time to collect on that order, which bill is your customer more likely to pay in a timely fashion? It sure made a lot of sense to me. In a recent article, "Tips to Improve Gross Margins," I shared several ways to boost gross margin percentages without bringing the hammer down on your suppliers. I was recently reminded of another way to preserve diminishing margins. One of the regional managers continued on page 34