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Double Your Firm’s Profitability: The Five Essential Actions

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Presenter: Al Bates, Principal, Distribution Performance Project

According to the TechServe Alliance Operating Practices Report, high-profit IT and engineering staffing firms are more than twice as profitable as the typical firm. How do they do it? In this special 2 hour session, Dr. Al Bates, the chief architect of the OPR and Sales & Recruiter Metrics Report, will draw upon the industry’s most comprehensive benchmarking reports to provide a roadmap and demystify what it takes to become a high-profit firm. In outlining the five essential actions that you can take to drive greater profitability, he will lay out not only “what to do” but “how to do it.”

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Double Your Firm’s Profitability: The Five Essential Actions

  1. 1. Five More Points Five Essential Actions Prepared For TechServe Alliance Prepared By Distribution Performance Project 3985 Wonderland Hill Ave., Suite 201 Boulder, CO 80304 720-668-8840 bigal6212@gmail.com distperf.com November 8, 2018
  2. 2. Distribution Performance ProjectExhibit 1 Objectives Of The Session • Review the Profit Structure of the Industry • Identify the Key Pressure Points in Improving Profitability • Develop an Action Plan to Improve Financial Performance Distribution Performance ProjectExhibit 2 Income Statement Results For Mountain View, Inc. Dollars Percent Gross Revenue 10,000,000 100.0 Direct Costs 7,350,000 73.5 Gross Profit 2,650,000 26.5 Payroll and Fringes 1,550,000 15.5 All Other Expenses 800,000 8.0 Total Expenses 2,350,000 23.5 Profit Before Taxes 300,000 Fixed Expenses 1,850,000 Variable Expenses 500,000 5.0 Accounts Receivable 1,500,000
  3. 3. Distribution Performance ProjectExhibit 3 A Tale Of Two Firms You Are You Should Here Be Here Gross Revenue 10,000,000 10,000,000 Direct Costs 7,350,000 6,950,000 Gross Profit 2,650,000 3,050,000 Payroll and Fringes 1,550,000 1,500,000 All Other Expenses 800,000 750,000 Total Expenses 2,350,000 2,250,000 Profit Before Taxes 300,000 800,000 Gross Revenue 100.0 100.0 Direct Costs 73.5 69.5 Gross Profit 26.5 30.5 Payroll and Fringes 15.5 15.0 All Other Expenses 8.0 7.5 Total Expenses 23.5 22.5 Profit Before Taxes 3.0 Distribution Performance ProjectExhibit 4 How Do They Do That? Revenue per Salesperson $3,294,000 $4,682,000 Revenue Per Recruiter $2,239,000 $2,066,000 Revenue Growth 5.1% 14.1% Revenue per Job Order $18,000 $18,000 Gross Profit 26.5%
  4. 4. Distribution Performance ProjectExhibit 5 The Recent Trend In Profit Margin 0.0 1.0 2.0 3.0 4.0 5.0 2013 2014 2015 2016 2017 Year PBT--% Distribution Performance ProjectExhibit 6 Thinking Back to the Dark Ages 2004 2017 Gross Revenue $7,000,000 $10,000,000 Direct Costs 5,110,000 7,350,000 Gross Profit 1,890,000 2,650,000 Owner's Compensation 285,000 350,000 All Other Payroll 870,000 1,200,000 All Other Expenses 455,000 800,000 Total Expenses 1,610,000 2,350,000 Profit Before Taxes $280,000 $300,000 Gross Revenue 100.0 100.0 Direct Costs 73.0 73.5 Gross Profit 27.0 26.5 Owner's Compensation 4.1 3.5 All Other Payroll 12.4 12.0 All Other Expenses 6.5 8.0 Total Expenses 23.0 23.5 Profit Before Taxes 4.0 3.0
  5. 5. Distribution Performance ProjectExhibit 7 The Two Requirements Of Any Business Proposition • Adequate Salary--Hours Worked • Adequate Profit--Risk Taken Distribution Performance ProjectExhibit 8 The Annual Income You Will Enjoy For Twenty Years At Retirement Current Salary 150,000 Starting Age 3 6 12 15 30 32,614 65,228 130,456 163,070 40 17,234 34,468 68,935 86,169 50 7,792 15,584 31,167 38,959 60 1,995 3,991 7,981 9,976 Percent Add-On For Retirement
  6. 6. Distribution Performance ProjectExhibit 9 Determining The REAL Profit For Your Firm 1 Reported Profit 300,000 2 Owners' Compensation--Total 150,000 3 Replacement Compensation 125,000 4 Adjustment to Profit [ 2 - 3 ] 25,000 5 Actual Profit [ 1 + 4 ] 325,000 Distribution Performance ProjectExhibit 10 An Improvement Path For Profit Margin 0.0 2.0 4.0 6.0 8.0 2018 2019 2020 2021 2022 2023 Year PBT--%
  7. 7. Distribution Performance ProjectExhibit 11 The Five • Set a realistic profit target • Understand the factors that drive profit • Maintain adequate sales force performance • Drive a significantly higher Gross Profit • Develop a complete profit plan Distribution Performance ProjectExhibit 12 The Improvement Model: A Rack-Suit Plan Increasing revenue by at least the inflation rate plus a safety factor of Force payroll to grow slower than revenue to create a revenue to payroll wedge of Increase the gross profit percentage (not gross profit dollars) by Decrease the other expense percentage (not expense dollars) by
  8. 8. Distribution Performance ProjectExhibit 13 The Relationship Between An Investment Reduction And Profit Margin 0.0 2.0 4.0 6.0 8.0 0.0 5.0 10.0 15.0 20.0 Reduction in Accounts Receivable--% PBT% Distribution Performance ProjectExhibit 14 The Relationship Between A Revenue Increase And Profit Margin 0.0 2.0 4.0 6.0 8.0 0.0 5.0 10.0 15.0 20.0 25.0 Revenue Increase--% PBT--%
  9. 9. Distribution Performance ProjectExhibit 15 The Relationship Between An Expense Decrease And Profit Margin 0.0 2.0 4.0 6.0 8.0 0.0 5.0 10.0 15.0 20.0 25.0 Decrease in Expenses With the Existing Revenue--% PBT--% Distribution Performance ProjectExhibit 16 The Relationship Between A Gross Profit Increase And Profit Margin 0.0 2.0 4.0 6.0 8.0 0.0 5.0 10.0 15.0 20.0 25.0 Increase in Gross Margin Dollars With Existing Revenue--% PBT--%
  10. 10. Distribution Performance ProjectExhibit 17 Implications From Other Industries Rev. Rev. Oper. Impact Size Growth GM Exp. DSO on PBT Low Mid High 1 147.5 2.5 6.2 8.7 2 122.2 2.2 5.6 7.8 3 120.5 2.2 5.5 7.7 4 65.6 1.7 4.1 5.8 5 60.9 1.6 4.0 5.6 6 58.7 1.6 4.0 5.6 7 57.9 1.6 3.9 5.5 8 56.1 1.6 3.9 5.5 9 46.3 1.5 3.7 5.1 10 43.5 1.4 3.6 5.0 Resulting PBT Distribution Performance ProjectExhibit 18 The Gross Profit/Expenses Linkage 0.0 10.0 20.0 30.0 40.0 50.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Gross Profit TotalExpenses
  11. 11. Distribution Performance ProjectExhibit 19 Where Do The Payroll Dollars Go? Percent of Percent Payroll Category Revenue of Payroll Officers/Owners 3.3 21.3 Sales/Recruiting 8.0 Accounting/Admin. 1.4 9.0 All Other 2.8 18.1 Total 15.5 100.0 Distribution Performance ProjectExhibit 20 The Range of Performance Median 25th% 75th% Base Compensation $60,000 $47,000 $70,000 Bonus/Commission/Incentives 41,000 27,000 78,000 Total Compensation $101,000 $74,000 $148,000 Revenue Generated $1,260,000 $390,000 $2,900,000 Gross Profit Generated $361,000 $132,000 $783,000 Contribution Dollars Generated $260,000 $ 58,000 $635,000 Common Experience Range of
  12. 12. Distribution Performance ProjectExhibit 21 The Variations Within a Single Firm Dollars Gross Profit Compensation Contribution Top Salesperson $620,000 $150,000 $450,000 Second Salesperson 457,000 117,000 320,000 Third Salesperson 325,000 106,000 210,000 Percent of Top Salesperson Top Salesperson 100.0 % 100.0 % 100.0 % Second Salesperson 73.7 78.5 70.2 Third Salesperson 52.4 71.1 46.0 Ratio of Top Salesperson to This Salesperson Top Salesperson 1.0 1.0 1.0 Second Salesperson 1.4 1.3 1.4 Third Salesperson 1.9 1.4 2.2 Distribution Performance ProjectExhibit 22 The Ten-Year Trend In Sales Performance 2007 2017 Percent Change Base Compensation $53,000 $60,000 13.2 Bonus/Commission/Incentives 37,000 41,000 10.8 Total Compensation $900,000 $101,000 12.2 Revenue Generated $1,675,000 $1,160,000 -30.7 Gross Profit Generated $430,000 $360,000 -16.2 Contribution Dollars Generated $340,000 $260,000 -23.5
  13. 13. Distribution Performance ProjectExhibit 23 It’s Not a PowerPoint Presentation Without a Pie Chart: 2010 Distribution of Sales People by Gross Margin Generated (Millions of Dollars) Under $.5 Million $.5 to $1.0 Million Over $1.0 Million Distribution Performance ProjectExhibit 24 It’s Not a PowerPoint Presentation Without a Pie Chart: 2017 Distribution of Salespeople by Gross Profit Generated (Millions of Dollars) Under $.5 Million $.5 to $1.0 Million Over $1.0 Million
  14. 14. Distribution Performance ProjectExhibit 25 Alternative Sales Force Compensation Systems Summary Income Statement Current Normal Draconian Gross Revenue 1,250,000 1,187,500 1,187,500 Direct Costs 918,750 918,750 918,750 Gross Profit 331,250 268,750 268,750 Commissions 41,000 33,265 Other Var. Exp 21,500 20,425 Fixed Expenses 231,250 231,250 231,250 Total Expenses 293,750 284,939 Net Profit 37,500 37,500 Unnecessary Price Cut Distribution Performance ProjectExhibit 26 Profit-Based Commission Rates Price Commission Commission Cut Dollars Rate 0 41,000 12.4 1 28,715 9.0 2 16,430 5.4 3 4,145 1.4 4 -8,140 -2.9 5 -20,425 -7.6 10 -81,850 -39.7
  15. 15. Distribution Performance ProjectExhibit 27 The Mandate For Change During Each Of The Next Five Years Gross Revenue 5.0 Gross Profit % 0.8 Revenue to Payroll Gap 1.0 Other Expense % -0.1 Distribution Performance ProjectExhibit 28 The Impact Of Making The Mandated Changes 2018 2019 2023 Gross Revenue 10,000,000 10,500,000 12,762,816 Direct Costs 7,350,000 7,633,500 8,870,157 Gross Profit 2,650,000 2,866,500 3,892,659 Payroll and Fringes 1,550,000 1,612,000 1,885,812 All Other Expenses 800,000 829,500 957,211 Total Expenses 2,350,000 2,441,500 2,843,023 Profit Before Taxes 300,000 425,000 1,049,636 Gross Revenue 100.0 100.0 100.0 Direct Costs 73.5 72.7 69.5 Gross Profit 26.5 27.3 30.5 Payroll and Fringes 15.5 15.4 14.8 All Other Expenses 8.0 7.9 7.5 Total Expenses 23.5 23.3 22.3 Profit Before Taxes 3.0 4.0
  16. 16. Distribution Performance ProjectExhibit 29 Mountain View’s Planning Process This Year Next Year Item Actual Plan Revenue 10,000,000 Direct Costs 7,350,000 Gross Profit 2,650,000 Payroll & Fringes 1,550,000 All Other Expenses 800,000 Total Expenses 2,350,000 Profit Before Taxes 300,000 Distribution Performance ProjectExhibit 30 The Conceptual Planning Process • • Forecast Revenue • Nudging Gross Profit • Calculating Expenses
  17. 17. Distribution Performance ProjectExhibit 31 Step One: Setting A Profit Target 1 Net Profit Before Taxes $ 300,000 2 Gross Revenue $ 10,000,000 3 Return on Revenue [ 1 / 2 ] 3.0 % 4 Improvement in ROR [ 1% to 2% ] % 5 Target Return on Revenue [ 3 + 4 ] % 6 Target Profit [ 2 x 5 ] $ Distribution Performance ProjectExhibit 32 You Can’t Do It This Way • Planning profit first is the only way to improve results • The fact that other factors--Revenue, Gross Profit and the like are unknown is completely immaterial • The rest of the plan must support the profit results
  18. 18. Distribution Performance ProjectExhibit 33 Step Two: Forecasting Sales 1 Actual Revenue Last Year $ 10,000,000 2 Conservative Increase--% % 3 Conservative Increase--$ [ 1 X 2 ] $ 4 Revenue Forecast [ 1 + 3 ] $ Distribution Performance ProjectExhibit 34 Step Three: Nudging Gross Profit 1 Current Gross Profit--% 26.5 % 2 Nudge Factor 0.5 % 3 Planned Gross Profit--% [ 1 + 2 ] 27.0 % 4 Planned Revenue $ 10,500,000 5 Planned Gross Profit--$ [ 3 X 4 ] $ 2,835,000
  19. 19. Distribution Performance ProjectExhibit 35 Step Four: Planning Expenses 1 Planned Gross Profit $ 2,835,000 2 Planned Profit $ 400,000 3 Planned Expenses [ 1 - 2 ] $ 2,435,000 4 Current Payroll $ 1,550,000 5 Planned Revenue Growth 5.0 % 6 Planed Revenue to Pay Delta 1.0 % 7 Planned Payroll Growth [ 5 - 6 ] 4.0 % 8 Planned Increase in Payroll [ 4 X 7 ] $ 62,000 9 Planned Payroll and Fringes [ 4 + 8 ] $ 1,612,000 10 Planned All Other Expenses [ 3 - 9 ] $ 823,000 Distribution Performance ProjectExhibit 36 Sources to Help Visit: Toggle to the Programs Tab Toggle down to Hand-on Tools Select any or all You must email for the passwords Designed for distributors, but 85% applicable to TechServe members
  20. 20. Distribution Performance ProjectExhibit 37 Summary And Conclusions A realistic profit goal is a 8.0% ROR, but probably over a five-year period Distribution Performance ProjectExhibit 38 Al Bates? I Thought He Was Dead Dr. Albert Bates is founder and Principal of the Distribution Performance Project, a research and education entity focusing exclusively on distribution. He makes approximately 100 presentations each year on topics such as Improving the Bottom Line, Doing More With Less and Pricing for Profit. He also heads the firm’s investigation into profitability research for over fifty different trade associations. Al received his doctorate from Indiana University. He is married and has three daughters. All four of the ladies in his life have black belts in Tae Kwon Do, so don’t criticize his presentation too much.

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