So, as promised…the story of how simple margin focus (sales x %) can have a huge impact.
The situation for this particular manufacturing organization was dire. The losses had been unsustainable for several years. The solution proposed was an increase in sales, and the addition of a night shift to facilitate the volume. However, there were several complications, not the least of which was the fact that the company had become a veritable leper to the lending community. Any increase in volume necessitates an influx of cash for inventory and receivables…so this was a big problem. Combine this with the fact that sales were unproven (beyond first order), and that the gross profit margin before labor and expenses was tight, and the company was setup for a final death blow.
It is difficult to determine all of the variables leading to the situation this organization found itself in…for there were many mistakes, blunders and unpredictable impositions…all colliding at the same time.
The organization had the wisdom to abort this proposed solution of increased sales, and instead targeted a sales reduction. Lowest margin commodities were abandoned, and the focus was turned to shifting sales to higher margin, valued-added, branded products. I have dubbed this process the Sales Shift.
The result was that sales moved from the forecast $9.0 m down to $3.5 m, and cash began to return to the company as inventory and receivables came in. By the end of the first year, the company was operating at a cashflow break even, instead of the $1.0 m plus annual losses.
How? While sales were drastically cut…margin was dramatically increased…netting the same result immediately, while employing less cash, and then providing the basis for sustainable increases in sales.
Now…maybe this is not rocket science. Maybe any good CFO could figure this out. Unfortunately the CFO that recommended the sales increase solution did not see this, and ended up losing his job over it.
I think that we can all suffer from a loss of objective perspective. Maybe its desperation. Maybe it is a personal attachment to a dream for some product or service we really wanted to launch, but can’t seem to get full value for in the sale.
Whatever the reason…please, do not over simplify solutions with sales growth. Be sure that each sales is a profitable one.
—
David E White
Performance Coach
