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Surviving the Recovery By Dr. Alber t D. Bates President, Profit Planning Group bigal@profitplanninggroup.com I n a slow-growing market, the chal- lenge is to somehow maintain sales momentumat a rate that exceeds the growth of the market as a whole. It is a difficult, but not insurmountable, task. This report looks at sales growth in a somewhat unconventional manner. It will do so by exploring two aspects of the sales equation:The SalesMandate, an examination of the relationship between sales growth and profitability; and Cost of Goods Not Sold,some spe- cific suggestions for ensuring that the firm gets every dollar of potential sales. The Sales Mandate One of the central tenets of profit improvement is that sales must grow faster than the expenses required to generate those sales. In particular, sales must (Medicare and FICA) as well as health insurance and retirement, usually a 401(k) program. The real requirement with regard to sales growth is for that increase in sales to be larger than the increase in payroll expense. This is what is commonly called a sales-to-payroll differential. A realistic target for the differential is two percent. If sales increases by 10 percent, then payroll could be allowed to increase by 8 percent to support the sales increase. As long as sales volume is growing at a reasonable rate, such as 10 percent, then the objective seems "easy" to achieve.When only a 5 percent increase in sales is possible,payrollmust be con- trolled more aggressively so that only a 3 percent increase is allowed. It is extremely important to note that, in terms of profitability, the 10 percent sales growth/8 percent payroll growth model is really not that much better than the 5 percent sales growth/3 per- cent payroll growth model. Any time 26 FEDA News & Views expenses—including all salaries, com- missions, bonuses, increase faster than payroll social Money Matters sales growth outpaces payroll growth (holding other factors constant), profit will increase appreciably.The challenge occurs when sales growth is very slow or even non-existent. Theoretically, a 2 percent sales-to-pay- roll differential can be generated even if sales are flat.With no sales growth,pay- roll would have to be reduced by 2 per- cent and there is the obvious potential for a death spiral in such a situation. Lower sales lead to lower payroll,which leads to poor customer service. Eventually,this leads to even lower sales. In the real world (where analysts fear to venture), life without sales growth is unthinkable. With a flat economy, growth must be taken out of a competi- tor's share. Ultimately, the key to gener- ating a continually higher level of sales growth is enhanced performance by the sales force. Cost of Goods Not Sold As long as the economy is growing costs briskly, an ineffective salesperson is a minor problem. A poor salesperson here, a poor one there; the good ones generate enough volume to cover up the problems.However,as the economy becomes less supportive of automatic growth,this scenario is no longer viable. Exhibit 1 looks at the profit impact of an ineffective salesperson for the typical FEDAmember. The first column of num- bers demonstrates total company per- formance. As indicated in the PROFIT Report, it is a $12,500,000 firm with a bottom line profit of $200,000 or 1.6 percent of sales. The only detail thatmight not be clear is that the sales force is being paid a commission equal to 10 percent of the gross margin dollars. In addition, there are other variable expenses equal to 5 percent of sales volume. The second column simply assumes that there are five salespeople and that every territory is exactly equal in poten- continued on page 28 Exhibit 1 The Challenge of Under-Performing Salespeople For the Typical FEDA Member Income Statement—$ Net Sales Cost of Goods Sold Gross Margin Expenses Sales Commissions Variable Expenses Fixed Expenses Total Expenses Profit Before Taxes Income Statement—% Net Sales Cost of Goods Sold Gross Margin Expenses Sales Commissions Variable Expenses Fixed Expenses Total Expenses Profit Before Taxes Current Results $12,500,000 9,437,500 3,062,500 306,250 625,000 1,931,250 2,862,500 $200,000 100.0 75.5 24.5 2.5 5.0 15.5 22.9 1.6 Salesperson $2,500,000 1,887,500 Per 612,500 61,250 125,000 386,250 572,500 $40,000 100.0 75.5 24.5 2.5 5.0 15.5 22.9 1.6 Salesperson $2,000,000 1,510,000 80% 490,000 49,000 100,000 386,250 535,250 -$45,250 100.0 75.5 24.5 2.5 5.0 19.3 26.8 -2.3