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By Mike Mallaro
Finding ways to increase profitability is a goal of most independent dealers
but sometimes profit enhancement opportunities are missed because dealers
overlook a fundamental axiom of business.
Specifically, the most profitable sales dollar is the incremental sales
dollar. The power of the incremental sales dollar is true in every type of
business. It always has been true and it always will be true. Understanding
the power of the incremental sales dollar can make a dramatic impact on the
profitability of the independent dealer, as I’ll show in the example below.
For purposes of this analysis, assume an independent dealer has the following
income statement for the year:
For every dollar in sales, this business keeps a dime, or 10 percent of
sales. In order to grow the profits of this business, the owner has several
options, such as opening another branch location, entering a new line of business
or aggressively marketing to new referral sources.
Another option is to leverage off existing relationships to get incremental
sales dollars. This approach almost always produces a greater profit margin
at a dramatically lower risk than any other profit growth strategy. Thus,
the amazing power of the incremental sales dollar.
The pro-forma below shows the impact of incremental sales on the P&L,
and also the impact of these incremental revenues assuming the price was discounted
20 percent to get them.
Incremental revenues at full billing rates yield a net profit margin of
50 percent in this example because there is no incremental payroll, business
development or occupancy cost associated with these referrals. Even when the
dealer agrees to a 20 percent discount on these incremental transactions,
the profit on the incremental dollar is 37.5 percent of sales, far superior
to the net profitability of the business without this incremental revenue.
In this example, the incremental revenues, even at discounted rates, increase
dealer profit by 15 percent per year with virtually no additional risk. This
is the power of the incremental sales dollar.
The trick in understanding these results is recognizing that “net profit”
and not “gross profit” is the appropriate indicator for evaluating incremental
revenue sources. A large portion of expenses in any business are fixed and
do not increase (or increase only slightly) with the addition of incremental
revenues. Accordingly, even when the gross profit margin on such sales is
lower than the average, these sales still result in a higher net profit than
existing revenues.
There are numerous forms of incremental revenue available to the independent
dealer, each providing an opportunity to capitalize on this profitable business
phenomenon. One simple way is to align yourself with an organization which
contracts with managed care plans. VGM’s HOMELINK® is just such an organization.
In 2003, HOMELINK will refer $50 million in revenues from managed care contracts.
This $50 million in revenue will be incremental sales for independent dealers,
and this level of sales has the potential to produce more than $15 million
in incremental profits for VGM members. Another opportunity for incremental
sales is to add a basic retail item to your sales floor for which customers
have a need.
The incremental sales dollar is a powerful concept and independent dealers
who take the time to understand it and capitalize on it will increase their
profits.
Mike Mallaro, CPA, is Chief Financial Officer and Chief Information
Officer for The VGM Group.
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