How many times have we heard about customer satisfaction, design integrity, customer-centricity, needs-satisfaction selling, consultative approach, innovation, continuous improvement, features, advantages, and benefits, customer experience, being customer-focused…yes, I know a lot of the terms…need I go on?
No matter how many times we hear these terms, understand them, and truly use and implement them, they won’t save us if we aren’t selling enough. Our great personality, charm, looks, experience, knowledge, and charisma will only take us so far if we don’t know at what point we are costing our company too much to employ us.
At some point, a salesperson should recognize that they are a small business inside of a larger one. This has pluses and minuses. It’s not that they don’t care about the overall health of the company, but as a “small business”, a salesperson must focus on their specific goals and objectives; their personal contribution to the bottom line and their income. If the salesperson maintains a profitable business, then they and the company often flourish. They often will be given the freedom and latitude to operate as they like while satisfying the customer, the company, and themselves.
The other side of this is that every salesperson’s ultimate success is tied to that of the company and everyone else. If the salesperson is surrounded by other salespeople not contributing their share to the bottom line, the company cannot afford to support anyone.
Before I tell you why this is so important to the individual salesperson (and for those of you who haven’t studied this before), here are some important facts.
“It's often said that more than half of new businesses fail during the first year. According to the Small Business Association (SBA), this isn't necessarily true. The SBA states that only 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10.”
“According to an article in FastCompany, "Why Most Venture Backed Companies Fail,"75 percent of venture-backed startups fail. This statistic is based on a Harvard Business School study by Shikhar Ghosh. Feb 18, 2017”
Bottom line – it takes a steady and predictable stream of revenue to operate a profitable company. Companies use many different methods to measure their success, but one of the most important elements to know, before opening the doors for business, is break-even. Anyone wishing to start a business (and continue successfully) should conduct a break-even analysis to determine precisely when they can expect their business to cover all expenses and start generating a profit; and it’s simple math.
To quote one website, “A company has achieved breakeven when its total sales or revenues equal its total expenses. You are without profit at the breakeven point. But you haven't incurred any losses either. This calculation is paramount for any business owner because the breakeven point is the lower limit of profit when determining margins.”
There are several types of costs that are involved, but the two most pertinent costs to consider are:
Fixed costs: These are costs that are the same regardless of how many items you sell. For a company, these will be things like rent, insurance, and technology tools. These must be covered before the first sale is made.
Variable costs: These are recurring costs that you must absorb with each unit you sell. This can be the cost of goods, freight, installation, delivery, design, and special equipment. The sell price must be high enough to at the very least, cover these expenses. If not, the sale is taken at a loss.
Business owners must know, in advance, if there is enough need for their product and/or service. They need to know if the price of their product or service is competitive. They need to know how many units they must sell at a specific price point, and within a specified time frame. These are a few of the leading indicators of profitability…and as a salesperson running your own business…the leading indicator of your income. Having fun yet?
The primary reason listed for business failure is Too Little Funding. The company starts out OK, but sales don’t come in soon enough to cover the original expenses and the owner no longer can cover them…so they have to close their doors. Last year, after being in business for at least six years, my favorite Chinese restaurant just disappeared one day; no explanation. Great as they were, we (and the neighborhood) apparently didn’t use them enough, so they couldn’t pay the rent. What does this all have to do with a salesperson?
As I mentioned, each salesperson is running a small business within their dealership. If their small business is just breaking even, then there is little need for that business. Each of these small businesses must contribute a certain amount to the bottom line. A portion of the profits from each sale goes to pay the company’s fixed costs. A portion should always cover the variable costs. While most salespeople can’t control the fixed costs, they can get involved with the variable ones.
How does a company determine the break-even point for an individual salesperson? How do you know where you stand?
Again, this is generally a simple math problem.
To start with, you have the salesperson’s base; salary or draw plus commissions. To that, the company has to add taxes and benefits; typically, around 21% of the base. If a salesperson has a $45,000.00 salary, then you have to add in about $9,450.00; a total investment of $54,450.00. Next, the company has to allow for expenses for which they may not be recompensed, like mileage, parking, and travel; but they pay back the salesperson.
No one gets hired or keeps their job just to hit break-even. If that salesperson sells $275,000.00 at 20% GP, that is $55,000.00. They’ve covered their personal cost. The dealership is at break-even on compensation but hasn’t made a dime of profit. Even worse, that still doesn’t take everything into account. That salesperson also uses utilities, staff (sales support, design, delivery, installation) and a portion of those things needs to be taken into consideration as part of the break-even analysis. Let’s not forget the fixed costs (rent, insurance, etc.) that are also associated with that salesperson’s contribution to the bottom line.
One last thing to consider with your personal break-even is your income. At what point have you sold enough to receive commissions? Some of that depends on your compensation program. Even a salaried employee who receives no commission needs to cover more than their salary and benefits. Many compensation plans don’t start paying commission till the draw or base is covered. It’s important to know these numbers for yourself as well as for the company.
As you start to create your forecast this year, think about what your break-even is and how much revenue you need to create to really be a top-producer and contributor. Your manager will love you for it!
Jim Heilborn is a business consultant specializing in the office furniture/products industry, working nationwide with dealers, manufacturers, and service providers. Jim has been associated with INDEAL for over six years, specializing in training and dealer development. He can be reached at 916.434.9811 or firstname.lastname@example.org