Albert Bates, founder of The Profit Planning Group, says trailer dealers should develop a management plan — rather than a budget — to improve financial performance and then develop and write down the essential goals in today's environment.
In “Triple Your Profit,” he said that the typical member of the National Trailer Dealers Association — based on the past five years of research by The Profit Planning Group — has net sales of $20 million per year, a gross margin of 16.5% (“on the low side — it'd be nice to do better”), a payroll of $1.6 million (“too high”), and a profit of $300,000, or 1.5%.
“If I'm looking at this from the longer term, I want to see that number triple to 4.5%,” he said.
The typical company has fixed expenses of $2.4 million and variable expenses of $600,000.
“Fixed expenses are overhead,” he said. “They only change after you take action. If you fire an employee, your fixed expenses go down. If you negotiate a lease, fixed expenses go down. Most are in the payroll category.
“Variable expenses change automatically. If you have more sales or less sales, these costs go up and down automatically.”
Bates said the profit margin for the average business went up to 3% in 2011 after being 1.3% in 2010 and less than 1% in 2009.
“I'd like profits to be 4.5% across the business cycle, which means if I have a good year, I could do 6%, 6.5%, 7%.”
The average sales growth was down 25% in 2009, then up 20% in 2010, and 40% in 2011.
“Profit is marginal when sales are soft,” Bates said. “I'd like to do is change it so when sales are soft, we do better than we are doing. And when sales are strong, we do beyond great. Right now, we seem to be a victim of what the economy is doing in the world. We're not knocking 'em dead. And that's my goal: knocking 'em dead.”
Setting some goals
Bates said these are the essential goals in today's environment for every NTDA business:
• Increase sales every single year by the inflation rate plus at least 3%.
“Trailer dealers have had some terrible years, so this may be a little ambitious, but I don’t think it is if we really work effectively,” he said. “It may mean I have to take some market share away from somebody or do some things I haven’t done in the past. Right now, the inflation rate is around 2%. So 2% plus a 3% sales increase is 5%. Year in year out, that’s tougher, but that’s my #1 goal.”
• Allow payroll to increase 2% less than savings.
“I want to gap between sales and payroll. I want sales to go up, and I probably won’t have any choice but to pay people more. But I want sales to go up 2% faster than payroll. That delta, as small as it looks, is absolutely crucial.”
• Increase the gross margin percentage—not the dollars, but gross margin as a percentage of revenue—by 3/10 of a percent.
“That gross margin was 16.5%. I want 16.8%. Am I happy? No, because the next year, I want it to go up by 3/10th more.”
Balancing sales and inventory
Using the typical NTDA company as an example, Bates said inventory or accounts receivable could be reduced by 5% without sales going down.
“This is counterintuitive,” he said. “You're going to have to trust me. Fixed expenses are the same and variable expenses are 3% of sales volume. This is for this year only. Net year, your fixed expenses are going to go up.
“If I reduce expenses, I get a different bottom line than if I raise my sales. The only problem is that expense control has terrible public relations, because if you're cutting expenses, you're going backwards and if you're raising sales, you're going forward. My answer is, I don't care whether you're going backwards or not. There's actually more impact by a 5% reduction in expenses than by a 5% increase in sales volume.”
“My drivers of profit are: #1, gross margin; #2, expense control; #3, sales; #4, inventory; and #5, accounts receivable. Focus on those for the rest of your life. Improving your performance requires you to be on that goal. Plan for how you're going to drive more sales, control expenses, and improve gross margin.”
Payroll and enthusiasm
Bates said it's possible to control the payroll without sacrificing employee enthusiasm.
“I'd like it if I could help employees make more, but also make more profit,” he said. “The only way I can do that is by building a sales-growth-to-payroll gap, wedge, delta, whatever you want to term it. If I have a 5% sales increase, payroll can go up by 3% because 5% minus 3% is 2%.
“Let's say we have a better year: a 10% sales increase means payroll is up 8% because I had to increase the infrastructure. Sales are up 15%, payroll's up 13%, it's still 2%. You're sitting there saying, ‘I'm going to have sales up by 15% and payroll by 3%, and we're going to have a 12-point delta.’ We've done this survey. It helps you understand the nature of your business. We find that over time, payroll stays about the same percentage of sales. It goes up and down dependent on the economy. In a wonderful year, when you have more sales, payroll as percentage of sales goes down. If it's a terrible year, it goes up a little bit. But over time, I guarantee you if we look at a recession year now versus 10 years ago, we're going to find payroll as a percentage of sales is the same number. In every industry, we have difficulty getting control of payroll. So I would argue that 15% sales growth and 13% payroll growth don't look like we've done much, but it's a major change in the character of this business.
“If you can drive the sales, if you can produce a 15% sales increase, you can afford to invest in infrastructure, you can hire more people, you can give people raises, and you can do things because sales is dragging it along.
“Sales volume by itself doesn't mean anything. The key is, how much payroll do you have to absorb to generate those sales? If I can do them simultaneously, I'm in good shape. I want to think about not just the sales. I want to have a big sales number without a large increase in payroll.”
He said there's one fly in the ointment: a salesman named, hypothetically, Fred.
“He's been with the business 20 years but stopped working 18 years ago,” Bates said. “The last few years, the economy was a little bit tight, and Fred didn't get a raise. We can help Fred catch up. The problem is, you're a $20 million business with 30 employees, and you know every one of them. You know Fred's daughter sick. ‘We need to help Fred catch up.’ If you have 20 or 30 employees, it's hard to be tough. I just want to make you a little bit tougher.
“Let me tell you about sales people. We did a lot of research and we found that out of 10 sales people in the world, there is one superstar. He's also a freakin' prima donna. I've also got two real good salesmen. I have five soldiers doing OK and two people who probably shouldn't be in sales. In an up market, I can carry those people. In a market that maybe is not up, I don't know if can carry them.
“We must get on top of payroll, and the sales force is the place to start. I don't mean to be brutal, but the sales force is almost always the weakest link. The nature of the sales job is that there are very few people who can do it effectively. It's not that people are not hard-working. It's not that they aren't honest. It's not that they don't want to do well. But the nature of the sales job is that it's very difficult to be effective. And most sales people aren't. We've got to get people who are.”
Typical trailer dealer profits
Bates gave an example of the difference in gross margin with the typical NTDA company with net sales of $20 million: a gross margin of 16.5% provides $3.3 million, and with variable expenses of $600,000, fixed expenses of $2.4 million, the before-taxes profit is $300,000. With a gross margin of 17%, the before-taxes profit is $400,000.
“People tell me if I raise my prices, I won't sell anything,” he said. “I'm going to raise my prices but still buy it at the old price. Buying it cheaper is nifty. Selling it higher is niftier. There is more opportunity outbound in terms of dollar generation than there is inbound.
“Suppliers announce that they are going to lower their prices to you by 1% at 10:21 am. What is going to happen at 10:22? What is your sales force going to do at 10:22? You're going to take it to the street. Absolutely. You can't help yourself.
“Every time you lower the price because you bought it cheaper, it drives profit out of the business. You know that suppliers aren't going to lower their price. Every time he raises his price, they're doing you a favor. The only problem is, that favor doesn't always get passed on correctly. If there's a 5% supplier increase, take up the price of goods 5%. Here's the challenge: Can you raise you prices a full 5% or only by 3%?
“If we can pass it along, price increases are the biggest thing on the face of the earth. If you have a business, the ideal business to be in is one where your prices are going up faster than the prices in the economy. I need the guts to pass it along.”