Avoiding a sting in the tail of
increased Sales targets.
From a credit management perspective, there are two
particularly challenging periods for anyone involved in determining and setting
appropriate credit lines to facilitate business.
The first is in the case of acquisition, where one has to
review acquired clients and respective lines, more so when there is client
overlap and the second, when Sales are faced with increased targets and it’s
this latter one I focus on.
It merits focus because this is one area and activity that
is often mismanaged with dire consequences to both risk and more importantly, diminished
gross margin.
If you sell to either corporate or SMB clients, you will
generally have a designated number of accounts to manage. Let’s assume you have
some thirty accounts; some will trade erratically, some may not trade at all
currently and only a handful, perhaps 6-10 deliver consistent orders. Not only
this, the bulk of your sales, (perhaps as high as 70%), are achieved through
just three accounts.
Invariably, major accounts that deliver most revenue are
more demanding of you when you try to sell them more. I’ll wager they also
provide the lowest gross margin but volume and corresponding Vendor discount
generates just enough to keep such margin above water.
Salespeople, certainly in IT Distribution, a sector in which
account manager changes are too frequent, are creatures of habit. When targets
increase, the immediate response is to go to those that trade regularly. Faced,
for example, with increasing sales by say 10%, first port of call are major accounts, those currently perhaps delivering
the lowest gross margin yield. They may already be pressured with restricted
credit lines but this cuts no ice, targets have to be achieved.
Buyers meanwhile, are astute, more so those who happen to be
principal clients. An approach to increase orders will invariably meet with the
response of “sure, but I’ll need
something in return, better pricing, higher marketing co-op funds or a more
generous volume discount”. A hard pill to swallow perhaps, but concern gets
buried by the pressing need to hit target. The net result may be an increase in
sales but an overall damaging further decline in gross margin return.
It’s quite something for a Distributor to have to sit and
wait for Vendor volume rebates in order to determine final profit or indeed visible
above the line return in trading with major clients. Competition is fierce but
this constant repetitive focus of trade with major clients has undoubtedly contributed
to downward Distributor margins over years.
There is a solution, indeed there always has been a
solution.
Many years ago, having tired of the constant barrage for
increased credit lines from Account Managers faced with increased targets, I
set about devoting time and effort into working with them to show how best to
achieve targets, this time using the full breadth and scope of their managed
accounts. Sales Managers sadly had reached a point where they had little time
to sit with their team or indeed train them in basic simple rudimentary research
and selling techniques. Their time was spent updating spreadsheets.
The very first time I did this, I picked the most onerous
persistent Account Manager and made arrangements to have him sit with me for an
hour or so. I had in the meanwhile obtained readily available information on
performance across his database. This included current sales, year to date
sales, cumulative sales, gross margin by account and average gross margin. I
also researched his current non trading accounts, irregular buyers, those with
no credit line and had his total credit availability matched to current debt
level.
He had 20 accounts assigned to him with just four major
accounts contributing 78% of his sales. Their limits were restrictive in terms
of accommodating more and gross margin achieved against these three averaged
just 2.5%.
He also had 9 active
accounts where balances were less than 50% of credit line capacity. Some of
these had healthy credit lines but clearly underused. The average gross margin
returned by this group was however 7%.
The remaining 7 accounts had no credit limit. Four of these
had traded historically with cumulative sales and margin evidenced and three,
had no transaction history at all.
I took the three with no trading history or credit line. I
showed him that all three merited a credit line and asked him why they were not
trading. He replied that he had not had the time to look at them. I showed him
their websites, nature of business and the profile of products supplied. His
interest heightened.
I looked at the four accounts that had clearly been regular
buyers in the past but which became lapsed accounts. I asked if he had called
any of them. He said that he had called two of them but they bought from others
because we could not match price and account manager changes pushed them away.
He said this without even blinking!
I again showed him their websites, cumulative sales that had
been achieved along with gross margin return. I also told him that up to 100K
of credit was available against this group.
I took issue with the 9 accounts that were utilising less
than 50% of their combined credit. His response was typical, “My notes showed these accounts were specked
by previous account managers and opportunity was limited” he said. I once
more followed the routine of showing him their websites, product portfolio and
better gross margin yield of these accounts. I advised him not only were they
using less than 50% of credit availability, I could add another 200K of credit
and as a salesman, he should know that no business stands still and constantly
changes; what they may had done two years ago is not what they now do. He
looked sheepish.
I finally touched on his four top clients and showed him why
credit availability was strained. I also showed him a comparison of gross
margin return of just these four compared to three years prior showing a
decline from 4%.
I assured him that if he dedicated time to his under-
utilised credit availability and made the calls, I would provide the credit
necessary for him to not only hit his 10% sales target but smash it with the
bonus of a better margin return against sales achieved. He surprised me in
truth in doing just that and what is more, he shared his experience with others
in his Sales Group who then similarly wanted to have their database usage
reviewed in similar fashion.
It is a sad reflection nonetheless that basic research and
analysis of client buying habits across databases is seemingly no longer a
function that Sales people or their managers have time for. It does however
demonstrate how Credit can be an incredibly valuable business development tool;
quite why it does not yet appear in any Credit job specification is
bewildering.
I recall a Sales visit to a major client as the Company
wanted to pitch for more of their business. This was a major risk client where
gross margins were perilously thin, almost zero, where credit was fully
stretched and risk was high and worsening. The pitch was three months sales at
cost and a slightly higher volume rebate. Even this offer was turned down as
others ‘gave more’ apparently. Unsurprisingly, the 200m turnover Reseller went
bust some 3-4 years later causing quite a stir.
Chasing existing revenue streams for more when capacity is
limited or restricted is folly. Invariably, if you target such sales singularly
or repetitively, client demands on you will guarantee lower gross margin
return. Seeking the best possible return against a client database often
provides more than ample headroom to not only increase sales but make
significant inroad to better margin yield.
It’s a simple and rewarding way of avoiding the sting in the
tail of increased targets.
