The MHEDA Journal - Second Quarter, 2016 - (Page 62)

mONEy sALEs gRoW TH maTTErS Too Much of a Good Thing BY DR. ALBERT D. BATES, DIREcTOR OF RESEARcH, PROFIT PLANNING GROUP F ew distributors ever say no to additional sales. Not that sales solve all problems, but sales growth is a lot more fun than sales stagnation. 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 performance. 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. 62 MHEDA | 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. Accounts Receivable Profit After Taxes + Inventory - Accounts Payable = $4,250,000 + $840,000 $4,250,000 = 12.4% - $1,750,000

Table of Contents for the Digital Edition of The MHEDA Journal - Second Quarter, 2016

Chairman’s Perspective
From the Desk of Liz Richards
Editor’s Note
Ask Your Board
MHEDA University Calendar
MHEDA Member Profile
Women @Work
Industry Puluse
Teamwork and Personal Accountability
Exhibitors' Showcase Product Guide and Floor Plan
Exhibitor Summaries
Global Citizenship
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
New Members
Spotlight on Association News
MHEDA Milestones
Index of Advertisers by Product Category
The Last Word

The MHEDA Journal - Second Quarter, 2016