The MHEDA Journal - Second Quarter, 2016 - (Page 62)
sALEs gRoW TH
Too Much of a Good Thing
BY DR. ALBERT D. BATES, DIREcTOR OF RESEARcH, PROFIT PLANNING GROUP
ew distributors ever say no to additional
sales. Not that sales solve all problems,
but sales growth is a lot more fun than
As it turns out, rapid growth creates as many problems
as it solves. If the firm grows too fast it will face cash flow
challenges. If it grows way too fast, it will probably die
from a lack of cash. Those are ominous alternatives.
The idea that sales growth can be too fast is somewhat
counterintuitive. Because of that it is necessary to understand exactly how sales growth impacts the firm's financial
The Good and Bad of Sales Growth
Exhibit 1 outlines the impact of a 15.0% sales increase
for a typical MHEDA member based upon the latest DiSc
Report. In the current column, the firm has $40,000,000 in
sales and earns a profit of $1,200,000. To generate this profit
the firm must invest $15,000,000 in total assets, much of
it in accounts receivable and inventory. This is somewhat
offset by $1,750,000 of supplier financing.
The second column details what 15.0% sales growth does
for the firm. Some of what happens is extremely positive.
Other results are negative and need to be addressed.
The income results are all positive. The firm increased
its sales by 15.0% while keeping the gross margin percentage the same. Payroll expenses were controlled so
that they have only increased by 13.0%. In addition, the
non-payroll expenses have only increased by 10.0%. The
firm is leveraging its expenses. This would be outstanding
performance based upon historical results.
The bottom of the income statement shows the payoff from this. Pre-tax profit goes from $1,200,000 to
$1,704,500, an increase of 42.0%. After the obligatory
income taxes (30%), the firm has $1,193,150 to reinvest
back in the business.
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To review the balance sheet it is necessary to start at the
bottom. All of the after-tax profit ($1,193,150) has been reinvested in the business, so total assets are now $16,193,150.
Working up from the bottom of the balance sheet, the All
Other Assets category did not increase.
However, both inventory and accounts receivable have
increased by 15.0% to support the increase in sales. As far as
inventory is concerned, this is what will happen inevitably,
albeit slowly. For accounts receivable this increase happens
automatically and instantly.
The final assets category, cash, is what is left over after
subtracting up from the bottom. In this scenario, cash falls
to $93,150. It is a sobering situation.
The situation is not completely dire. The firm can count on
additional supplier financing because of increased purchasing
to support the increased sales. This is shown at the bottom
of the exhibit. The firm can also use its line of credit. The
challenge is that with the deteriorating cash situation, it may
be forced to do so rather than choosing to do so.
The necessity for distributors is to avoid the cash challenge
in the first place. This requires understanding exactly how
fast the company can grow and what it might do to overcome
the potential cash predicament.
The Growth Potential Index
Understanding how fast the firm can grow necessitates
looking at a slightly complicated-but extremely important-
formula called the Growth Potential Index (GPI). It provides
an estimate of how fast the firm can grow without using up
its precious cash reserves, which are currently $175,000.
Profit After Taxes
Table of Contents for the Digital Edition of The MHEDA Journal - Second Quarter, 2016
From the Desk of Liz Richards
Ask Your Board
MHEDA University Calendar
MHEDA Member Profile
Teamwork and Personal Accountability
Exhibitors' Showcase Product Guide and Floor Plan
Six C-Level Cyber Blunders (And Solutions)
What to Look Forward to in 2016
How to Build a sense of Community for Your Business
Women Mean Business
What's Your Exit Strategy?
Creating Great Customer Experiences: Why, How and Why Now?
Turning Near Misses into a Winning Safety Environment
Too Much of a Good Thing
Matuson's Sixteen Workplace Predictions for 2016
Spotlight on Association News
Index of Advertisers by Product Category
The Last Word
The MHEDA Journal - Second Quarter, 2016