October 2012

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Page 47 of 67

Profit Improvement Report Deploying an Efficient Sales Force Nowhere to Hide: Surviving the Recovery by Dealer sales account reps don't all have to be spectacular – but they do have to be adequate. BY DR. ALBERT D. BATES The American economy continues to grow at a rate that is somewhere between modest and anemic. Good economic news is almost always followed by bad news. The hope that a rising tide would lift all boats seems ephemeral. In a slow-growing market, the challenge is to somehow maintain sales momentum at 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: n The Sales Mandate – An examina- tion of the relationship between sales growth and profitability n Cost of Goods Not Sold – Some specific 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 increase faster than payroll expenses – including all salaries, commissions, bonuses, social costs (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 2 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, payroll must be controlled more aggressively, so that 46 | www.cedmag.com | Construction Equipment Distribution | October 2012 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 percent payroll growth model. Any time sales growth outpaces payroll growth (holding other factors constant), profit will increase appreciably. The challenge occurs when sales growth is very slow or even nonexistent. Theoretically, a 2 percent sales-to- payroll differential can be generated even if sales are flat. With no sales growth, payroll would have to be reduced by 2 percent. There is the obvi- ous potential for a death spiral in such a situation. Lower sales leads 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, (continued on page 48)

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