Wholesale / Distribution Basic Math
•competitive strategy •distribution management best practices •business math for distribution •wholesale distribution basic math •business modelMonday, November 16, 2015—There's a lot of math in wholesale distribution, but how much of it REALLY matters when it comes to your business?
In this video, I discuss the two most important numbers when it comes to wholesale distribution math. I also provide an essential calculation for how your sales force should be paid.
Let me start by sharing a disturbing statistic: The average distributor retains less than 25% of the profits made on the best parts of their business. The rest is siphoned away to pay for all of the unprofitable business that the distributor is involved in.
How is this happening? Because distributors are far too often focused on the wrong numbers!
Most distributors are too busy looking at revenues, margins, and cost-cutting – to no great effect – while not thinking about how the money is actually being made.
There are two numbers that every distributor should focus on. The first is gross profit. Gross profit is the money you make from selling your products and services to the world. It's a function of sales volume and margin. Gross profit is important because it's your operating budget.
The second number is cost to serve, which is the expenses associated with delivering your product (or service) into the hands of customers. Cost to serve must ALWAYS be less than the gross profit, but that's rarely the case. In more than half of everything that most distributors do, those numbers are upside down. This is the reason why your company isn't able take advantage of the massive profits floating through your business.
This brings us to an important formula called "Net Before Compensation." The way the formula works is by taking your gross profit line and deducting all of your operating expenses except for what you pay your salesperson. This gives you the actual amount of profit that you make before you pay your salesperson.
This number is valuable because, unlike gross margin, it takes your operating expenses into account. Anything that raises the cost of your transaction will be reflected in this number. If everybody is focused on managing the NBC, you can't help but be profitable because everybody is working to keep your transaction and other operational costs down. It can also help you to avoid paying commissions that would make sales unprofitable.
The beauty of NBC is that companies of all sizes can make use of this information. Just have whoever puts together your company's numbers run an extra report that shows the numbers that we discussed (or you can have a service like WayPoint Analytics do it for you). Once you start using NBC, you can manage your company the same way as the top performers do.
For more information about Randy MacLean, visit: www.waypointanalytics.net
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