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2017 NFDA Profit Report Available For Purchase

Tuesday, August 15, 2017   (1 Comments)
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NFDA members can purchase the report for $250. Non-members can purchase it for $500.

 

Most distributors can justifiably feel pretty good about their recent operating performance. A growing, if not booming, economy has helped generate reasonable sales growth for most firms. There is a chance for firms to collect their corrective breath and plan for the future.

 

At the same time, there is continual pressure on gross margins from both existing and potentially new competitors. Upward pressures on costs, particularly payroll, refuse to go away.

 

Given this mixed environment, this report will address three key questions for NFDA distributors:

 

1.    How are we doing?

  • What is the typical level of profitability in the industry?

2.    How good can we be?

  • What results are being generated by the most successful firms?

3.    How do we get to high-profit results?

  • Which of the Critical Profit Variables (CPVs) appear to drive profitability?

 

Typical Versus High-Profit

 

The first two questions are easily answered by examining the figures in the top part of Exhibit 1. These figures present two different measures of profit for both the typical NFDA member and the most profitable members.

 

Profit Before Taxes % measures pre-tax profit as a percent of revenue. For the typical NFDA member this figure was 4.4%, while the high-profit firms enjoyed a 8.5% PBT.

 

Return on Assets (ROA) calculates the same pre-tax profit figure as a percent of the total asset investment in the business. Again, there was a striking difference with the typical firm at 9.7% versus 24.6% for the high-profit firms.

 

The Critical Profit Drivers

 

In trying to move from typical to high-profit, the key is to understand the nature of the CPVs. Namely, which ones are most important and how did they impact performance for the typical and high-profit firms.

 

Managing the CPVs

 

The CPV results for the typical firm and high-profit firm in the industry are summarized in the figures in the bottom half of Exhibit 1. While there are other factors which could be examined in evaluating performance, these are the ones that really drive performance.

 

Exhibit 1
The Critical Profit Variables

 

 

Typical

 

High Profit

 

Performance Results

 

 

 

 

Profit Margin (pre tax)

4.4%

 

8.5%

 

 

Return on Assets

9.7%

 

24.6%

 

 

The Critical Profit Variables

 

 

 

 

 

Sales Change

-4.0%

 

-1.3%

 

 

Gross Margin

37.1%

 

48.9%

 

 

Payroll Expense

22.7%

 

29.8%

 

 

Non-Payroll Expenses

10.0%

 

10.7%

 

 

 

One of the common misunderstandings regarding the CPVs is that to be a high-profit firm it is necessary to 1) do a lot better than the typical firm and 2) do a lot better in every CPVs. Nothing could be further from the truth.

 

As it turns out, some of the differences in the CPVs between typical and high-profit are often extremely small. The small differences tend to multiply to produce major changes in profit margin. This perspective has been repeated constantly by the Profit Planning Group as “little things mean a lot.”

 

It is also often surprising to learn that it is not even necessary to do a little better everywhere. No firm produces superior results for every single CPV in either good times or bad. Successful firms manage their CPV performance to maximize overall profitability. This also is great news for the typical firm. Perfection is not required, only blending the CPVs in a positive way. With such blending, profit rises significantly.

 

The CPVs that are the most important contributors to enhancing profit are sales growth, gross margin, payroll expenses and non-payroll expenses. Each factor must be planned carefully to ensure adequate profits.

 

  • Sales Growth

There is a common misperception that sales solves all problems. Sales certainly helps with most problems. However, the ideal level of sales growth is in a fairly narrow range. Excessively slow growth certainly creates profit problems. Interestingly, excessively rapid growth does also.

 

Slow sales growth means that expenses, which tend to be tied closely to inflation, out-pace the rate of growth so that expenses as a percent of sales increase. While very few firms believe so, rapid sales growth is also a problem. Financing rapid growth is always a challenge, and operating systems tend to get taxed when growth is too rapid.

 

The rate of sales growth that allows firms to operate without serious financial challenges depends upon the rate of inflation. The “ideal” rate of growth is the inflation rate plus three to six percentage points. So, if the inflation rate is 2.0%, then ideal sales growth would be in the 5.0% to 8.0% range. This should be viewed as a minimum. Firms may grow faster, but without basic growth, profit improvement is very difficult.

 

  • Gross Margin

Price pressures never go away, even if sales are growing. It would seem that as sales growth takes hold, firms would enjoy a pricing advantage. The reality is just the opposite. The excitement associated with increasing sales tends to cause firms to become lax with regard to pricing control.

 

In almost every industry an adequate gross margin is a major determinant of profitability. The real driver behind improved, or at least maintained, gross margin performance is continual monitoring. There is not a firm in any industry that could not make a modest improvement in gross margin, even including the high-profit ones.

 

Gross margin, in turn, is largely a pricing issue. Margin enhancement through pricing changes must involve stretching the price matrix. In simplest terms, distributors tend to be price aggressive on fast-selling items, which they should be. However, they tend to under-price slower selling items. It is a substantial opportunity to raise gross margin. Of even greater consequence, it is payroll-expense free.

  • Payroll Expenses

Payroll is always the largest expense factor in a distribution business. As a result, controlling payroll is essential to controlling expenses. Payroll is another area where a specific improvement goal can be established. Ideally, payroll costs should increase by about 2.0% less than sales. For example, if sales increase by 5.0%, then payroll should only be allowed to increase by 3.0%.

 

At first glance, controlling payroll growth would appear to be a relatively simple, and probably easy, to achieve target. The reality is a different story. Controlling payroll becomes even more difficult in a growth market. Firms often hire in expectation of even more sales growth. Additionally, the same "eye off of the ball" problem associated with gross margin also takes place with regard to payroll.

  • Non-Payroll Expenses

The non-payroll expenses are the "least difficult" of expenses to control. Most of these expenses can be brought into line as long as sales really are rising faster than inflation. The vast majority of these expenses are directly related to the rate of inflation. As long as sales growth is maintained above the inflation rate, there is the potential to lower the non-payroll expense percentage.

 

Moving Towards High-Profit Results

 

The high-profit firms produce great results virtually every year. They also reflect the fact that there are no industry barriers to success. The key to improved performance is to develop a specific plan for each of the CPVs and combine them in a positive way. The goal is not perfection. The goal is to do a little better across the board. It is an opportunity which is open to every firm.

 

NFDA members can purchase the report for $250. Non-members can purchase it for $500.

Comments...

David R. Broehm, Mid-State Bolt & Nut Co., Inc. says...
Posted Thursday, August 17, 2017
If we participated in survey how do we go about getting a copy of the report? I didn't see a link other than the ability to purchase for those who didn't participate??

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