5/2/2016
HEADLINES
PERSPECTIVE – Bates Tells SEFA: ”Force Payroll to Grow Slower Than Sales”
Holding down payroll costs may be the first and best step to higher profits, Dr. Albert Bates told the Southeastern Fastener Association.
In a sample income statement for a distributorship with $10 million in sales, Bates, founder of chair of the Colorado-based Profit Planning Group, pointed to the payroll and fringes totaling 20%, which he declared was “too high.”
Bates’ profit improvement model calls for distributors to “force payroll to grow slower than sales.”
He cited a National Fastener Distributors Association survey from 20 years ago which “shows payroll today at the same percentage of sales.”
If sales grow 5%, payroll growth should be limited to 3%. “Build a 2% sales growth to payroll growth gap,” he recommended.
Bates cited the “profit impact of a sales to payroll wedge: If current $10m sales yield 5% profit, then a 2% payroll wedge on 5% sales growth yields 5.4% profit.
Controlling payroll can mean letting go the 18-year salesperson who everyone likes, Bates acknowledged. The salesperson may be selling but not seeking higher prices or more lines, Bates explained.
“Sales don’t provide profit,” Bates pointed out. “Get rid of people who are ineffective on the sales side.”
Salespeople need to ask for more lines. Sales people resist because they are going to be told ’no’ nine out of 10 times, Bates finds.
Commissions should be based on gross margin, not total sales, the author of “Breaking Down the Profit Barriers in Distribution” told SEFA.
Management may be too concerned about the cost of training to replace the underperforming sales veteran, Bates said.
Bates acknowledged it is tougher for small companies “where everybody knows all employees.”
“Every employee wants a raise,” putting “incredible pressures on payroll,” Bates acknowledged. But the answer may be, “You no longer get a raise – you get to keep your job.”
In profit planning, “technology will not save your buns if you still are not getting control of payroll,” Bates said.
Beyond payroll, sales increases are a “nice driver of profitability,” but expense decreases offer a sharper profit increase and gross margin shows the steepest profit increase.
Increasing profit is “going to happen unless we take some action,” Bates said. “Fixed expenses only change when action is taken.”
“Pricing drives profit faster than sales,” Bates pointed out.
Every year upward pressure on expenses, he acknowledged.
• “Buying it cheaper is nifty,” Bates said. “Selling higher is niftier.”
• “Price increases are your friend,” but if you can’t pass along price increases, “it is the kiss of death.”
“Raise prices where you can,” Bates counseled. “We must get control of gross margin – largely through pricing.”
• “Sell 10% more of ‘D’ items.”
Bates finds there is a “wide divergence in the fastener industry on gross margin.”
Bates advocated setting a “realistic profit goal” of 10% profit before taxes over a five-year period.
Ultimately, “driving higher profits requires focusing on the right things,” Bates said. “We should have a plan.” Web: ProfitPlanningGroup.com
Tips That Work for 3 Fastener Execs
After consultant Albert Bates gave his advice on profits to the Southeastern Fastener Association, three fastener executives offered “Getting Serious About Profit” tips based on what they’ve found work in their companies:
• Jake Davis, president of Kansas City-based BTM Manufacturing said an early profit question is: “How many pounds of wire do we have?” That leads to working with customers to reduce inventory. “Communication with customers is key,” Davis declared.
“Customers vary,” Davis acknowledged. The goal is projections six or 12 months out.
“At some point, you may be best off to ‘fire’ a customer,” Davis said.
Be aware that even the best estimates be off. When the agriculture market dropped precipitously “our hand was forced” on staff, Davis recalled. Web: btm-mfg.com
• Craig Penland of South Carolina-based metric fastener distributor Eurolink FSS, tracks accounts receivable. That may mean “holding firm” even with customers you like. “It can be scary when it is major customer,” Penland acknowledged.
If the average customer pays in 34 days.
Eurolink FSS has new tracking system of sales per rep.
Sit down with top 10 suppliers to cut lead times, Penland advised.
“I live and die by projections,” Penland added.
Ultimately, “we focus on what we can do better,” Penland said.
With a small staff of eight – and most of them younger – Penland finds training is vital.
Penland said there shouldn’t be any price cutting for the customer “who comes to us for one item every six months.” That customer needs to pay for the workload. Web: eurolinkfss.com
• “Hire slowly, fire quickly,” advised Doug Ruggles of Martin Fastening of Jackson, TN, where agriculture is a big part of the business. Before adding another employee, calculate whether overtime is cheaper, he said.
Don’t just look at total sales, rather measure sales by each person, Ruggles said.
Act early: “Keep your finger on the pulse of sales monthly – and adjust accordingly,” Ruggles said.
Approach customers to find ways to “lower cost of serving you” and work more as “partners,” Ruggles advised. For example, why should manufacturer pay to box fasteners and then the distributor re-box for a customer? That is catching waste in system and then everybody wins.
If customers don’t cooperate, “raise prices on the customers who don’t work with you,” Ruggles added.
To cut health care costs, Martin Fastening encourages an “active wellness plan” with a $100 Visa card incentive. Martin wants employees to know their baseline numbers such as blood pressure to catch changes early. It is part of Martin’s self insurance program. Web: MartinSupply.com
Social Media?
In response to SEFA members’ questions about social media, Davis said BTM doesn’t have a written policy, but when he suspects an employee is spending too much time on texting or tweeting, “I just stand by them” to give them a more traditional message.
Penland takes each situation “case by case.” One employee was required to “leave his cell in his car.”
Ruggles said Martin has considered bans on social media such as Facebook during work, but ultimately the question is: “Is the employee getting the work done?”
“As we hire younger, social media may be more of an issue,” Davis observed.
Ruggles pointed out that millennial employees will have grown up “multi-tasking.”
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