Issue link: https://www.e-digitaleditions.com/i/314415
16 FEDA News & Views Sales growth can lead to empty promises if a distributor fails to focus on what really matters, says Dr. Bates Current Business Profit Profit Income Statement ($) Results As Usual Deterioration Enhancement Net Sales $15,000,000 $16,500,000 $16,500,000 $16,500,000 Cost of Goods Sold 11,625,000 12,787,500 12,821,250 12,753,750 Gross Margin 3,375,000 3,712,500 3,678,750 3,746,250 Expenses Payroll and Fringe Benefits 2,100,000 2,310,000 2,331,000 2,289,000 All Other Expenses 975,000 1,072,500 1,072,500 1,072,500 Total Expenses 3,075,000 3,382,500 3,403,500 3,361,500 Profit Before Taxes $300,000 $330,000 $275,250 $384,750 Income Statement (%) Net Sales 100.0 100.0 100.0 100.0 Cost of Goods Sold 77.5 77.5 77.7 77.3 Gross Margin 22.5 22.5 22.4 22.7 Expenses Payroll and Fringe Benefits 14.0 14.0 14.1 13.9 All Other Expenses 6.5 6.5 6.5 6.5 Total Expenses 20.5 20.5 20.6 20.4 Profit Before Taxes 2.0 2.0 1.7 2.3 Exhibit 1 The Impact of 10.0% Sales Growth for the Typical FEDA Member ------------------10.0% Sales Increase------------------ By Dr. Albert D. Bates President, Profit Planning Group bigal@profitplanninggroup.com T he last couple of years have seen distributors recover from the recession and enjoy some dramatically improved levels of sales growth. Some of that growth was the result of the acquisition of competitors weakened by the recession. However, most of the growth has been organic. The economy may not be completely back on track, but sales have increased at a reasonable pace. Unfortunately, this sales growth has not translated into increased profits. While there was a very modest increase in dollar profits, profit growth lagged well behind sales growth across almost all of distribution during this period. Sales growth proved extremely hollow. This report examines the sales growth versus profit growth dilemma from two different perspectives: profit growth pressure points (an exploration of the two key factors that were behind the lag in profitability), EXHIBIT 1 The Impact of 10% Sales Growth for the Typical FEDA Member continued on page 26 and changing the sales to profit relationship (an identification of specific actions that firms must take to turn sales growth into profit growth). Profit Growth Pressure Points The profitability culprits for distributors were pressures on the gross margin percentage and accelerating payroll costs. To be clear, distributors did not suffer any major problems in these areas. However, even extremely small changes have a large cumulative effect on profit. Exhibit 1 demonstrates the impact of sales growth on profit for the typical FEDA distributor based upon the latest PROFIT Report. As can be seen, the firm generates $15,000,000 in