As a general rule, the lower the gross-profit ratio, the lower the selling-expense-to-sales ratio. For example, if you’re selling highly competitive, name-brand products, your gross-profit margin will be low, and your selling-expense-to-sales ratio also will be less than the industry average. While it would be nice to have it both ways — that is, high gross-profit margins and low selling-expense-to-sales ratios — this generally isn’t realistic.
What should key ratios be for a typical catalog company, both consumer and b-to-b? Below, I provide several key ratio guidelines, but keep in mind these ratios vary by catalog company. Again, the key to profitability is to manage these key ratios. If, for example, you prospect more aggressively, you’ll increase your selling-expense-to-sales ratio, and doing so could result in a loss on your income statement. Yet, you might decide to accept a short-term loss on the bottom line in exchange for long-term growth and improved profitability. Just know the probable impact such decisions will make on your income statement before you act.
Format of Income Statement
Often, direct-selling (catalog) expenses are included in the general and administrative (G&A) expenses. However, direct-selling expenses should be grouped both together and separately on your income statement as shown in our example of a typical income statement (see chart “Typical Catalog Income Statement” ). By grouping these expenses in this way, it’s much easier to manage this ratio.
Shipping & Handling Income and Expense
New guidelines from The Direct Marketing Association note that direct marketers should not charge customers more than a “reasonable amount” for shipping and handling (S&H). That is, S&H should not be thought of as a profit center.
That said, it’s important that you know if you’re making or losing money on S&H. Thus it’s common to show S&H on a catalog income statement. Moreover, S&H expenses should be handled on your income statement, too. Most often, shipping income is posted to the revenue line (e.g., sales). This is a legitimate revenue line item that’s part of gross sales.