Strategy: Generate Extra Revenue While Leveraging Existing Overheard
I’ve always believed you put dollars in the bank, not percentages. For example, it’s not the percent of net income that’s important, but the total dollars of profit achieved.
To maximize dollars, manage the income statement by the ratios as a percentage of net sales — the dollars will take care of themselves. This month, I’ll review the key ratios of a typical profit and loss (P&L) statement for a B-to-B and a B-to-C catalog company and discuss how these ratios are different today than just a few short years ago.
If your company’s experience has been similar to others, sales are flat (or down), expenses are up and your bottom line is getting squeezed. It’s no secret catalogers are feeling the pinch. It’ll pass, but in the meantime, managing the key ratios on your P&L is even more critical for protecting net income.
Margins Up, Expenses Up
B-to-C catalogers traditionally have posted EBITs (Earnings Before Interest and Taxes) of around 5 percent. An EBIT of 10 percent to 14 percent has been more common for B-to-B mailers. But today, these profit margins are difficult to achieve. The combination of increased costs, harsh economic conditions and lower response rates is forcing catalogers to decrease circulation and make other cuts to maintain profitability.
How you organize your income statement is very important. Often, selling expenses are shown as part of operating expenses, which camouflages the overall selling expense-to-sales ratio and makes these expenses much more difficult to manage. I prefer to see direct selling expenses broken out on income statements so the overall ratio can be managed. Managing your selling expense-to-sales ratio is just as important as tracking gross profit margin on a monthly basis — these expenses can easily get out of hand if they’re not managed as a percentage of sales.
