The MHEDA Journal - Third Quarter, 2015 - (Page 87)

MONEy DISC REpORT MATTERS Turning Sales Into Profit takeaways from MHEDA's DiSC Report E BY AL BATES very analysis of distributor profitability comes to the same conclusions: Three key factors drive profitability. Those factors are (1) the ability to increase sales a little faster than inflation, (2) the ability to maintain an adequate gross margin in the face of competitive pressures and (3) maintaining control of expenses, especially payroll, despite an upward trend in expenses associated with an improved economy. The reality is that very few companies generate outstanding performance in all three of these areas. In general, most of the more-profitable firms manage the profit drivers just a "little bit" better than the typical firm in the industry. This small delta in performance is enough to generate dramatically higher profit. The MHEDA financial benchmarking study provides some key insights into exactly how the high-profit firms generate better profit numbers. It focuses intently on the three profit drivers- growth, gross margin and expenses. The report provides clear evidence as to how small differences in those few areas translate directly into higher levels of profitability. Typical Versus High Profit The term "Typical Firm" in the report means the firm that is most representative of the industry. This typical firm is the one with financial performance in the exact middle of the results for all participating firms. That is, on any given measure, half of the firms performed better than the typical firm and half performed worse. It is the best measure of industry performance on the profit drivers. In 2014 the typical firm generated sales of $35,660,000. On that sales base, it produced a pre-tax profit of $1,069,800, which equates to a profit margin of 3.0% of sales. Stated somewhat differently, every $1.00 of sales resulted in 3.0 cents of profit. The results can best be described as adequate. Quite simply, they are not as strong as they should be. In contrast to the typical firm, the high-profit firm generated a profit margin of 6.2%. This means that even if the high-profit firm had produced the same sales volume as the typical firm, it would have generated more profit for reinvestment in the firm. It is a reinvestment factor that tends to multiply over time. In trying to move from typical to highprofit, the key is to understand the nature of what are commonly called the Critical Profit Variables or the CPVs. Namely, which factors are most important and how do they impact performance for the typical and high-profit firms. Managing the CPVs The CPV results for the typical firm and high-profit firm in the industry are summarized in Exhibit 1. While there are other factors that could be examined Exhibit 1 The Critical Profit Variables Typical High Profit $35,660,000 $38,099,194 3.0% 6.2% Sales Change 11.4% 10.2% Gross Margin 28.5% 27.7% Payroll Expense 15.8% 13.9% Non-Payroll Expenses 9.4% 7.6% Performance Results Net Sales Profit Margin (pre-tax) The Critical Profit Variables The MHEDA Journal | Third Quar ter 2 015 87

Table of Contents for the Digital Edition of The MHEDA Journal - Third Quarter, 2015

President’s Perspective
From the Desk of Liz Richards
Editor’s Note
Ask Your Board
In Memory
MHEDA University Calendar
MHEDA Member Profile
@ Work
Industry Pulse
Happy Anniversary!
Best of the Best
Celebrating Material Handling Rock Stars
An Interactive Experience
The Trend Toward Automation
Automation and Labor
How to Talk to Someone Significantly Younger or Les Experienced Than You
Integrating Your Online Presence into a Mobile Market
The Other Competitive Advantage
Hack-Proof Your Company’s Social Media
MHEDA Convention Recap
Turning Sales into Profit
Ten Reasons Why You Can’t Fill Jobs
Sucesion Planning
New Members
Spotlight on Association News
MHEDA Milestones
Index to Advertisers by Product Category
The Last Word

The MHEDA Journal - Third Quarter, 2015