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Money Matters continued tial.Mathematically,all of the numbers in the first column have been divided by five. The last column examines the profit impact of a salesperson that only pro- duces 80 percent ofwhat a typical sales- personwould produce in the same terri- tory. This is not 80 percent of the top salesperson,but the average one.As can be seen, the territory that should gener- ate $40,000 in profit actually has lost $45,250. The difference between the profit the territory could have generated and what it actually generated is what the author has termed "Cost of Goods Not Sold. " This is a loss that is never seen on the income statement because the performance of the poor salesperson is offset by the performance of the good ones.All the firmtends to focus on is the aggregate results in column one. In the short run, in every territory some sales volume is better than none. In addition, the costs of replacing a salesperson are extremely visible.There are recruitment costs plus the fact that the salesperson will undoubtedly need time to ramp up to a desired level. Even then, the replacement may be no better than the original. These factors make firms extremely hesitant to make staffing changes with regard to sales. A Managerial Sidebar: Isn't a Higher Growth Rate Better? sales growth would always produce a dramatically higher level of profit than slower growth. In truth, the real key is the ability to generate the sales-to-payroll differential. For the typical FEDA member, 5 Intuitively it would seem that faster It is not the intent of this report to decimate the sales force. It is simply to state that generating higher profit is indelibly linked to generating a suffi- cient rate of sales growth.That growth can only be achieved in a sluggish econ- omy if every salesperson is performing adequately—not spectacularly. Only a few can reach that level. Adequacy should be expected from all. For outside salespeople, measuring performance accurately requires know- ing the potential in each territory. Firms must spend at least some time evaluat- ing account potential.Without this indi- cator, firms can still intuitively distin- guish great salespeople fromtypical,but will have real problems determining whether the low-end performer is inad- equate or is saddle with a less-desirable territory. For inside salespeople, life ismuch eas- ier. It is only necessary to knowthe total number of customer contacts. Sales per contact is a simple,but effective ratio. Ensuring that sales performance is adequate also requires incorporating a specific set of metrics into the compa- ny'smanagement information system. In particular, it is essential to understand the extent to which the salesperson is maximizing the potential of every trans- action. Two key factors have always been important in transaction analysis. Income Statement--$ Net Sales Cost of Goods Sold Gross Margin Expenses Payroll percent sales growth combined with 3 percent payroll growth drives profit from the current $200,000 to $248,000.With 10 percent sales growth and 8 percent payroll growth, profit increases to $258,000. Admit- tedly, $258,000 is higher than $248,000. However, the difference is not dramatic. Both scenarios reflect a significant improvement in prof- itability. 28 FEDA News & Views All Other Expenses Total Expenses Profit Before Taxes Income Statement--% Net Sales Cost of Goods Sold Gross Margin Expenses Payroll All Other Expenses Total Expenses Profit Before Taxes Results The first is the number of line items sold per transaction.This measures perform- ance with regard to add-on selling.The second is the average line value. This reflects the capacity for up-selling. Without a system that can pinpoint these issues per-salesperson basis, improvement is simply not possible. Moving Forward Sales growth must be maintained at a level that allows the firm to produce a sales-to-payroll differential of something in the 2 percent range.When (not if) the economy starts growing again, this will be easier to accomplish. In the mean- time, firms need to use every tool avail- able to ensure that the productivity tar- gets of the sales force are being met. u About the Author: Dr.Albert D. Bates is founder and presi- dent of Profit Planning Group. His lat- est book, TripleYour Profit!, is avail- able at: www.tripleyourprofitbook.com, as well as Amazon and Barnes & Noble. ©2012 Profit Planning Group. FEDA has unlimited duplication rights for this manu- script. Further,members may duplicate this report for their internal use in any way desired. Duplication by any other organiza- tion in any manner is strictly prohibited. The Impact of a 2% Sales Growth to Payroll Differential Current 5% Sales Growth $12,500,000 9,437,500 3,062,500 1,900,000 962,500 2,862,500 $200,000 100.0 75.5 24.5 15.2 7.7 22.9 1.6 $13,125,000 9,909,375 3,215,625 1,957,000 1,010,625 2,967,625 $248,000 100.0 75.5 24.5 4.9 7.7 22.6 1.9 10% Sales Growth $13,750,000 10,381,250 3,368,750 2,052,000 1,058,750 3,110,750 $258,000 00.0 75.5 24.5 14.9 7.7 22.6 1.9