Part 60: Profitability Algorithm – How Small & Mid Sized Companies Grow

Did you know that you can translate what your staff does into how the company makes money? This can be done for any company in any line of business. This is called a profitability algorithm that converts staff productivity and efficiency values into sales and margin. With this in hand one only can subtract fixed cost and they can arrive at the company’s bottom line profit.

This information enables the company to focus in on which areas are performing well and which need improvement. Thus instead of trying to work everything, or guess where the problem is, one can zero in on those specific items where improvement is needed. In some cases there maybe tradeoffs that are needed to maximize results, such as sacrificing higher bill rates to get more volume, or reducing margin rates to get more order and a higher fill ratio. In all cases the idea is not to increase one item be it bill rates or margin rates, but rather to maximize margin $ and overall profit.

For example if a sales rep has 200 sales conversations a week that would be a productivity number, if out of those conversations they got 20 job orders that would be an efficiency value of 0.10, in turn if 4 of those orders resulted in a sale, that would be a 0.40 fill ratio. If those orders generated $200 each and the margin rate on those orders was 33%, then that sales person would generate $800 in sales and $264 in margin per week, or $1,056 in 4 week month. If there were 10 sales reps this would generate $10,560 in margin on sales of $32,000. If the company’s fixed cost was $9,000 this would result in a profit of $1,560 and a return on sales of some 5%.

With this information one can figure out the best structure an individual deal, create a profit plan that can explore the best option, set up a win-win commission plan for their rep, etc. Let’s take the example above. For example if sales calls increased by 5% and all other things remained constant, profit would increase to $2,616 from $1,560 or $1,056 or more then doubling profit. Alternatively, one could work on trade offs. If margins were reduced by 3% to become more competitive and fill ratios rose by 10% they would generate $3,400 in monthly profits vs. $1,560 or an increase of $1,840 or again increasing profits over 2 fold. This same concept could be applied to most any job function or process, designing a unique algorithm.

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