Hello and welcome to today's webinar. Our speaker today is Al Bates. Before I turn it over to Al, I'd like to let those of you who are live with us know that you may submit questions during the webinar via the chat box in the lower left side of your screen. There is a handout for today's presentation that is available as a PDF in the handouts tab of the webinar homepage. This webinar will also be recorded so that you may watch or re-watch on demand at your convenience. And with that, I will turn it over to Al. Great. Thank you, Liz. Delighted to be with everybody today to talk about getting to the financial light at the end of the tunnel. I wish we had a more positive topic. I wish it was maximizing profit in a rapidly growing market, but that would have been about four or five months ago. So for right now, we've got to play it the way it lays. And what we're going to try to do is talk about how we get through financially where we are. And I'm going to take information from your benchmarking survey, which you should all take part in, and develop a little model and see where do we stand on the spectrum from absolute panic to absolute relax. And everybody is somewhere in that particular spectrum, and we'll try to see where we are. I've got three quick ground rules before we jump in. Number one, you should have a handout, as Liz indicated. Actually, number one, you must have a handout. Number two is we will see if there are any questions, but generally people don't ask questions. I want you to ask a question that might be private. So on the cover of the handout, the third line from the bottom is my email address. And if you have a question, feel free to send that to me. I will answer it usually the same day, and I will answer that privately so that your concerns don't get shared with the entire world. And then number three, and this is the most important one I have, I am not going to tell you what to do. I have listened to a dozen webinars in the last couple of weeks and read a ton of articles, and they all talk about the five things you have to do in today's environment. The reality is nobody knows, and anybody who says they can tell you what to do is making it up as they go. What I'm going to try to do, hopefully successfully, is give you a framework in which you can take your understanding of where we are going and say what does it mean for me and my particular company. So I'm not going to have any here's what you should do, I'm going to have some here's what you should think about as you figure out what you do. With that said, let's jump into the handout. The exhibits are numbered in the lower left-hand corner so you can't get lost. I'm going to try to do four things today if I could. Number one is outline a financial appraisal of where the firm stands. I'm going to give you two ratios, which I think are absolutely critical to understand where we are. Now there's probably another hundred ratios that you should be worrying about all the time, but these to me are two that give me an overview of where I am and what it means, and I'll talk about those. Number two, I want to identify the key mistakes in the past to be avoided. Mistakes is a loaded term. It's actually more human nature responses. And after 9-11, I looked at what distributors did because I had a lot of benchmarking data, and distributors made some great decisions and they made some bad decisions. Human nature. After the Great Recession, they made the same good decisions and unfortunately the same bad decisions, and so I'd like to see if this time around we can do more of the good and none of the bad if at all possible, but some of the pressures are weighed upon you by other people, but we'll see if we can avoid these mistakes. For about the last 15 minutes of our discussion today, which will be about 45 in total, I want to put together an action plan going forward to say what do we need to worry about so that we are in better shape next time we have a problem like this. How do we become a more profitable distribution organization in the world? And then finally for the last 3 minutes, I'm going to identify some free software. Notice the word free. Free does not mean crummy. It means free. Some things that you can look at to maybe think about your business a little bit better. I know you're big companies and you've got a lot of sophisticated software on your own, but I've got some things that are out there that might help you. Good. Let's do the first one. Outline a financial appraisal of where the firm stands. To do that, I'm going to go into your benchmarking survey and build a fairly typical firm. It's doing $50 million and I know a lot of you are bigger than that, but that's the number that we have to keep from having too many zeros in our discussion. You've got a gross margin of 22%, which is a little tight, slightly lower than most people in similar lines of trade, let's call it industrial and construction distribution. A little bit tight, but not bad. Then down below that you've got some expenses. For right now, I want to break life into payroll and fringes and all other. Payroll and fringes, everybody's W-2 as long as you're in the United States. Everybody's FICA, Medicare, health insurance, which is probably out of control, 401K programs, and workers comp. It's a fully loaded number. Then all other is everything else. Rent, utilities, depreciation, interest, bad debts, a whole litany. Notice that the lion's share of our expenses are payroll. This is the way every distributor is in the world. We're not unique, but it does say that if we start talking about improving performance, we might want to take a look at payroll. I'm not going to be a slash and burn guy, not at all, but I am going to suggest that maybe we've got to take a look at payroll and see do we have areas where we have a little bit more, we're not quite as productive as we might be. Finally, if I take my expenses and subtract them from my gross margin, I get a bottom line profit of $2 million or 4%. Jot that down, please, because it's been left blank in your handout intentionally to keep you following along. It's a nice number. In all candor, a good number and we can be thankful that this pandemic hit now as opposed to in the middle of the Great Recession in which the numbers were not quite as wonderful, so at least we're not fighting one battle at a time. Now, in order to see what we should do or think about what we should do, I'm not going to tell you what to do, tell you how to think about what to do, we need to break those expenses a different way. Down at the bottom of the exhibit, too, I've got the same expenses, which are $9 million, but I broke them into fixed and variable. It's crucial to do this. Most companies of your size probably have done this. My experience has been, though, that most companies do this incorrectly and smaller companies probably haven't done it at all. Fixed expenses are basically those expenses that only change when we take an action, and the sorts of actions that we typically take early when there's a downturn is we begin to cut things that we think are expendable expenses, so we cut travel, one of the first things we cut. We also cut training, which gives me real chest pains because I'm in training, but that's what we do. We cut those expenses, but those expenses only go down because we took an action. If you don't take an action, they do not go down. In very sharp contrast, variable expenses change automatically as sales change. If we have more sales, which is positive, or less sales, which is negative, these expenses go down proportionally with sales. They include things like commissions, interest on accounts receivable, bad debts, those sorts of things. We've got our company laid out, and we have two things to know. We know payroll is a big item. We know the gross margin could be better. We've got our fixed and variable expenses outlined for us. If you have not done your fixed and variable, it's a homework assignment. You must do it. If you have done it before, go back and make sure you've done it correctly because most people tend to overestimate what the variable expenses are. When sales turn down, fewer expenses go away than we might think go away. That's got the income statement. Let's go to Exhibit 3 and look at the balance sheet, and then we'll finally be ready to start our discussion. On Exhibit 3, I've only got four items. I've got cash, and you have a pretty good hunk of cash, but you're big. All things considered, it's not a giant amount of cash. If you have a lot of cash, you're called a bank. Distributors have not much cash, but it's okay. What we have is a fair amount of accounts receivable, $5 million, and a lifetime supply of inventory. Down below that, we have accounts payable, how much we owe our suppliers. Usually at this point, distributors begin to panic a little bit because I owe my suppliers $12.5 million, and I've only got $1.75 million in the bank. Not a problem. As long as the railroad keeps running, not a problem at all. I sell some stuff. I collect money for it. I pay my suppliers. We keep trucking. It's when the railroad slows down or, God forbid, the railroad stops that things get a little bit tacky, and we need to worry about it. Let's look at these ratios if we could. In Exhibit 4, we have two. One, and I remind you, you should look at another hundred ratios, but these are two that give me an overview of where you are. One is a profit ratio. One is a cash ratio. The profit ratio is the break-even point. How much of the sales decline can you manage before you begin to get into desperation measures? Desperation measures to me means you don't just cut travel and education. You begin to cut infrastructure. We begin to get rid of people, maybe some of whom are not working, some of whom are working. We cut infrastructure. When the recession is over, we add infrastructure back. We cut, we add. It's dysfunctional. What I want to measure is how much do we have to worry before we should make those unpleasant changes in our particular expense structure. That's the profit ratio. Again, you need to know your variable expenses to calculate it. Down below that is a cash ratio called the collection sensitivity ratio. This is a ratio that you have never calculated in your life. I can say that because I invented this ratio two weeks ago. What it says is one of the major drags that we have when things get a little slow is collections begin to wander out a little bit. How much can collections lag before we begin to have a severe cash crisis? We're looking at that. There's lots of other things you could look at, but those are the two I think are most important today. With those two ratios set up, let's calculate first our break-even point in exhibit number five. Exhibit five is simply a ratio. Exhibit six is where we talk about the implications of that ratio, but you can't talk about the implications until you calculate the ratio. I've entitled exhibit five, and this is a sort of smart-ass title I'm famous for, The Results When the Band Stops Playing. What happens when things get really nasty? My break-even point. You have to know three things to calculate it. You need to know your gross margin percentage, which we said was 22 for the typical firm. If you do not know that number, you do not have an accounting system. You need to know your fixed expenses in dollars for the entire year. We're going to look at this on an annual basis. It's crucial to do it annually. Then I need to know my variable expenses as percent of sales. Once we know those three numbers and we do not overstate what the variable expenses are, and I'm estimating them to be five percent, a reasonable guess, I think, we can go to the formula which says we're going to put our fixed expenses in the numerator. Back in the old days, before most of you folks were born, we used to call that the nut. It's what we have to crack each year before we can begin to have a profit, and it's 6.5 million. In the denominator, I've got my gross margin minus my variable expenses. What it says is when you generate a dollar worth of sales, you don't keep the whole dollar, puppy. 78 cents goes right through the suppliers, and you get to keep the gross margin, which is 22 percent, minus the variable expenses is five. I've got a break-even point. Push the button now and show the people the number. There it is, 38 million and change. It's an ugly number, but it calculates out correctly for my in this particular industry. So blooming what? Exhibit number six is so blooming what? It's entitled What Happened There, and it says that the typical firm could take about a 23.5 percent sales hit before it went to break-even. I put a brilliant piece of work on the screen, which you should write down, and it says that a 20 percent safety factor is a goal. Now, before I talk about the 23.5, let me talk about this goal. Back a long time ago after 9-11, I looked at what happens to distributors' performance, and I set a goal. I was really brilliant back then. I said we need to have a 10 percent safety factor. Then in the Great Recession, a lot of companies had a 20 percent sales decline, and I decided I wasn't quite as brilliant as I originally thought I was. So I've gone to a built-in suspenders view of life. A built-in suspenders view of life says 20 percent is a reasonable safety factor to have. We are beyond that at 23.5. I will tell you this. I've done about 20 of these webinars so far in distribution. You have got the widest safety factor of any line of trade out there. You also, however, sell stuff that people can stop buying instantly. So the fact we've got a giant safety factor doesn't mean we're home free, but it does say we've got as much breathing room as we can possibly have in our particular environment. If we do not cut the fixed expenses, and you are free to do so, as you well know, the fixed expenses would stay the same, the verb expenses go down right along with sales, and my profit ends up being zero. That's how we get the break-even point. So that's where we are. Now before we leave this exhibit, please write this down. This is for a full year. What we've got to do is decide what does this mean for a full year. If you recall back, and it's hard to recall back now, January and February were pretty darn good months in the American economy. March, for most people, was an okay month. A little up, a little down, but okay. April was not a month to write home to mom about. It was a terrible month. What you need to decide going forward, because I can't decide for you, is the future of this year going to be all Aprils, or is it going to be about two or three Aprils followed by a couple of Marches and then some January and February? I don't know. You don't know, but you've got some ideas, and nobody else knows. You've got to figure out what does it mean. Twenty-three and a half, is that enough, or should I begin to make some decisions now? Maybe you can do that, but I want you to at least know where you stand, and you should calculate this for your business. Let's talk about the cash side, which is also important. The cash side says we're going to measure accounts receivable performance on Exhibit Number 7. We've got two ratios there, one of which you calculate all the time, and that's in the bottom called the collection period, or the DSO, the day sales outstanding. How fast do you collect your bills? You look at it all the time. To calculate that, though, in the benchmarking report, we have to calculate something else, which you probably don't look at. It's called collections per day. How much money comes in every day from people who have bought stuff from you and not yet paid you? I believe the number is left blank in your handout, so let's go ahead and write it down, please. $136,986. Let's call it $137,000. So every day, we get $137,000. May come in by check, may come in electronically, it may come in that a guy brings an Adage case in with a full of $100 bills, I don't care, but that's how much we collect every day. That is then used in your benchmarking report to calculate the actual DSO, which I believe is already written down in your handout, 36.5. And what it says is we have $5 million of accounts receivable that was off exhibit number three, 137,000 represents one day. So if I've got to drain 5 million at $137,000 a day, draining it, it will take me 36 and a half days to drain it. That's the ratio that you look at all the time. Well, what does it mean? This gets us to the new ratio, which you have not looked at, the collection sensitivity ratio. And what we're seeing is we've got a 1,750,000 of cash on hand, which is nice, but not gigantic. It's $136,000 per day. If people start to pay me slower, how much slower can they pay me before I run out of cash? And the answer is 12.8 days, write it down, about 13 days. That's a fairly nice factor to have. And if I relate that to my collection period, 12.8 on a 36 and a half day base, you got about a 35% breathing room. So you've got good breathing room on both the sales and the cash side, assuming that things eventually recover, you got to figure out whether they do or not. It's your business, your decision to make. So we're in decent shape abstractly. How decent it is depends upon what happens in the future and only you can make that particular decision. Now, we should be aware of that. As our customers pay us slower, if they do, we can then back up the rest of the channel. We can pay our suppliers slower. Okay, that tends to happen a lot in down markets. We also have a line of credit, but the only thing I'd warn you is banks are notorious for canceling lines of credit when things get even slightly sticky. So I hope you're looking at your financial position with those other hundred ratios I talked about. All right, take a deep breath. Try not to hyperventilate and let's go, if we could, to exhibit number nine. And what I wanna do is look at, it says the volume sensitivity of three profit groups. And what I've done on exhibit number nine on the left-hand side is I've broken out from your benchmarking report, the typical firm, the high profit firm and the low profit firm. Now, you don't calculate low profit firm in the report, so I had to interpolate that. I'm kind of winging it a little bit. The typical firm, 4% bottom line, could take a 23 1⁄2% hit. The high profit folks, oh, look at those puppies, 7 1⁄2% bottom line. They can take a 44% sales hit before they begin to panic. That's a nice number. That's a sensational number. Those folks who are low profit, and I'm again estimating this, but I think it's pretty close based on what I know in some other industries, barely at break-even already, at about 3% away from disaster, which says there may be some problems, there may be some issues in this industry for some players. You need to be high profit. Now, at this point, I want you to raise your right hand and take an oath. And that oath is, gee, we seem to have a problem every 10 years. 9-11, great recession, pandemic here. When we have another one 10 years from now, I'm gonna be a high profit distributor. I'm gonna have a 7 1⁄2% bottom line, and I'm gonna have a 44% breeding room in my particular business. That's what we're gonna talk about in a couple of minutes when we go forward. But for right now, I want you to go to Exhibit 10, and I'm gonna go back to Exhibit 1 and reminisce. We said the second thing we were gonna do was identify what mistakes or what sort of human nature pressures do we feel in a down market? To do that, I've got a fairly complicated exhibit, but one that you need to have for your company, and I'll tell you how to get it a little bit later. I wanna look at, it says, the relative impact of improvements in the CPVs. The CPV, that stands for me, for critical profit variables. What drives profit in your business? And there are five of them, sales, gross margin, expenses, inventory, and accounts receivable. And what we're doing on the vertical axis is we're saying, hey, we've got a 4% PBT as a starting point. Let's begin to make some changes on these five CPVs. Let's do 5%, better, 10, 15, 20, and see what happens to my PBT. Going across those lines, the bottom two are accounts receivable and inventory. And I think on your screen, they're in yellow and purple. Excel does this for me. I have no idea how we got those colors. Those lines are fairly flat, particularly the accounts receivable line. Even the inventory line is flatter than we might think it is. And what it says is if you reduce the inventory or the accounts receivable, and let's use 10% since that's kind of the middle, your PBT does not go up much. What this says is the following. Inventory and accounts receivable have a huge, gigantic impact on your cash position. They have a very, very modest impact on your profit position. It's a fact of life. You probably don't believe that, but I'm gonna prove it in about three more exhibits. They just don't drive profit, they drive cash. And if you're up to your ears in accounts receivable and inventory, you have no cash. Now, please note for those lines, just a real quick reminder, as I am improving those by 10%, that means cutting them by 10%, I'm assuming sales don't go down. So I'm giving those the benefit of the doubt. The next line up on your screen in your handout, which is kind of a dotted line, and I think it's aquamarine, it's sales. And sales is a nice higher slope, but not gigantic. And what it says is as you drive more sales, you've got more expenses, you can't get away from it. It's a nice line, but not a gigantic line. Above that is a line that will cause us to gnash our teeth, and that is the expense line. And what it says is a 10% cut in expenses drives a heck of a lot more profit to the bottom line than does a 10% increase in sales. Now, that says nothing about market share. That says nothing about motivating employees, because you can probably motivate employees to sell more. Real hard to motivate employees to cut expenses. They just don't rise to that occasion real well. And then the final line, the highest line, is gross margin. So we've got some priorities. We need to keep these in mind as we think about things we might do wrong in a recession. Gross margin is the most important. Expenses is a pretty close second. Sales is a slightly distant third. Inventory is well beyond in fourth, accounts stable, a very distant fifth. All right, well, what sort of mistakes do we make? Well, the number one mistake we make is tied to the number one profit factor on exhibit number 10. And if you go to exhibit number 11, it is, in fact, the reality that in a down market, we tend to cut price. It's a fact of life. So what we have on exhibit number 11 is the increase in unit sales, physical volume activity required to exactly offset a price reduction. And we're doing two things. Across the horizontal axis, we're cutting our price across the board at this point, cutting our price on everything at this particular point. And then we're asking ourselves, how much do we have to increase our unit sales to offset it? Every one of those dots on that line that looks to me like it curves, every one of those dots, I make two million bucks. That's the iso-profit line. Now, if we go up to 5% on the price cut, just let your finger go across on your handout, go up to 5%, come back across, it looks like I hit about 40%, plus the 5% price cut, so I gotta do 45% more dollar volume. What this line says is, in your industry, with your margin structure, your expense structure, it is almost impossible to make it up with sales. Not impossible, but really close to it, particularly in a down market. Now, I'm gonna tell one quick vignette. It's a war story I love to tell. It was on the TV in the Denver market here about two weeks ago. There was a guy who ran a food truck outside an office complex. And every day, he sold 100 lunches. He was knocking them dead. Then the virus hit, and everybody went to a skeleton crew, and he sold not 100 lunches, he sold 10 lunches. And he said, aha, I will cut my price and increase demand, and he cut his price, and he sold 10 lunches. Folks, when they ain't buying, they ain't buying. Now, it's possible that some people will buy if you cut price, because they're gonna buy now in anticipation of not having to buy later. That would be people who you sell to are cash rich who can make advanced purchases, but we're probably not gonna drive demand. Now, this is across the board. I also know that you are not going to cut price. However, there are some idiot competitors in the world who may well cut price. You need to have a response, and that response is you need to be as selective as you can be. And exhibit number 12 says, the economics of price adjustments by velocity code. And what I've done is I've taken your business, and I've broken it into machines, parts, service, and rental out of your benchmarking report. And I don't know anything about your business really, but I know that those are different categories with different sensitivities. And machines appear to be about 60% of your revenue. Parts are 20, service is 15, and rental's five. Here's what it says. If your competitors who are stupid cut their price by 5%, and you are forced to go along because machines are price sensitive, which they may be, I don't know, if you wanna keep the gross margin right where it is, which is 22% of revenue, you have to do all three of the things below. Raise your price on parts 5%, raise your service price is 6.7, raise your rental price is 20%. I don't know if you can do that or not do that, because I don't know the price sensitivity of those categories, but it does say you need to make sure you can hold the line. So if price cuts are going through, they're not across the board, because they're across the board, we are really in some trouble. Alrighty, let's talk about the second challenge that we have in the down market, and this is collections. And what I have on exhibit number 13 is I have calculation for sensitivity with regard to collections. And what I'm gonna do is I'm gonna go back and say, we calculated a long time ago, we calculated that collections per day to $136,000. If we collect in 36 and a half days, which we're now doing, 136 times 36 and a half is, that's how you end up with $5 million of accounts receivable. Suppose that we say, hey, you know, it's a down market, let's cut the accounts receivable by five days, let's cut it to 31 and a half. And I do the same sales, big assumption, mega assumption. We make the same sales, so I have the same 136,000 a day, but times 31 and a half days, I can cut my AR to 4,000,003. I can free up 684,000 of accounts receivable, which becomes cash. And we had, I believe, 1,750,000, so I bumped my cash by about 33% or so. What's the profit implication? Well, down in line number seven, there's a carrying cost. You folks all know there's a carrying cost of inventory. There's also a carrying cost on accounts receivable. It is interest, which is pretty darn low right now. It is bad debts. It is the cost of hounding people. It's all those. I've made it 8%. In today's market, it's not even close to eight. It's way below that, but I'm using a more traditional interest rate environment. So 8% times 684,000 freed up, your profit goes up by $54,000. That ain't much because you're making $2 million. I said earlier, brilliantly, I thought, that reducing inventory accounts receivable has a big impact on your cash, but a small impact on your profit. I think this kind of suggests that's true, at least with regard to accounts receivable. Now, what is the profit hangover from this? Exhibit 14 says, let's calculate the breakeven point. How much would sales have to go down to offset that fact that we cut the accounts receivable by five days and got more profit? I've got a formula in exhibit number 14, which says we're gonna take our fixed expenses, which are still six and a half million bucks. I'm gonna add my profit, which we're currently making $2 million. I'm gonna subtract how much we just made from reducing the accounts receivable, and I'm gonna put that in my breakeven formula and calculate a number. And what it says is sales only have to fall to, I think the number's in your handout at the bottom, 49,677, ugly number, or sales only have to fall by six-tenths of a percent. Now you've got a conundrum, and this is where I always tell you to think about what to do, but I don't tell you what to do, because I don't know. Should I cut accounts receivable? Well, if I think it's gonna cause my sales to go down by more than six-tenths percent, I'm in a box. You've gotta calculate how you get out of this box and what the box means for you. All I can do is give you tools to get there. All right, one last thing, and that is I told you I was not gonna tell you what to do. On exhibit number 15 and 16, I'm gonna tell you what to do, and that is do not, shout out, stop buying. In a down market, the first thing companies do is they stop buying. It is a kiss of death. And what exhibit number 15 says is inventory has got a problem. It's gotta deal with cash and profit at the same time. We deal with profit by providing, in the middle column, customer service. We have a fill rate. We have a service level. We have things when people want to buy it. With the same token, we got a cash situation. We gotta have financial stability. I just can't have my company up to its ears in inventory, and we calculate that with inventory turnover. So I got two ratios. Here's the problem. It is really difficult to measure the fill rate of the service level. It's really easy to calculate inventory turnover. I own a copy of Excel, and I can calculate inventory turnover to 64 decimal places. That's pretty good. I have no idea what fill rate is. Here's a problem, particularly in the down market. If I have two ratios, one of which I have trouble measuring, and one of which I can measure to 64 decimal places, I will always move towards less inventory, and that's the implication. Service level suggests kind of more inventory. Financial stability suggests less, and in a down market, we tend to cut the inventory, particularly by stop buying. I just want to give you two little mantras at the bottom of Exhibit 15. The sales force says this every day. Can't sell apples from an empty cart. Brilliant. And the financial folks, cash is king, also brilliant. Here's the problem. If you go into a stop buying mode, the first thing you'll run out of is things that people want to buy. And exhibit number 16 says, that's probably not a good idea. Exhibit 16 is going to give you some negative information. And that negative information is, people do not buy from you because you're good looking. And you say, really? I thought they did. No. Exhibit number 16 has the five most important factors that your customers identify in buying from you. This is done in every line of trade, and the same factors come up every time. You have a fill rate. You have things I want. You have depth of assortment. You have a lot of things I want, and facilitate one-stop shopping. You have speed of delivery. I actually wanted it two days ago and forgot to order it, but you sent it to me. You have order accuracy. You send me the right stuff. And then if all that works out, your pricing is good. If you stop buying, you'll run out of the key items that people want to buy. It is a kiss of death. Let's don't do that, if we can avoid it. Alrighty. Please go to exhibit number 17, and I'm going to go back to exhibit 1 and reminisce, yes, again. Okay? I want to suggest an action plan. The economy is going to get better. I have no idea if it's a V recession, a U recession, an L recession, or the hated W recession. I have no idea. Sooner or later, things get better. When they do, we need to begin to focus ourselves on some issues. And exhibit number 17 is entitled, What's Wrong With This Picture? And what it says is, we have a payroll challenge. Everybody in distribution has a payroll challenge. Don't feel like you're the only one, but here's our challenge. If I calculate sales per employee, which is the classic employee productivity ratio, which is total sales divided by every man, woman, and child who works there, it went up between 2014-2018, according to your benchmarking survey, by 3.7%. It's an improvement, but it's not gigantic. If I look at the bottom payroll percent of sales, it's actually slightly dribbling up. And we've got a problem. And that problem is, we have low productivity. We're doing better, but not gigantically better. We have healthcare costs that are out of control. And we had, if you think back to January and February, incredible wage pressure. Right now, you do not have wage pressure. You've got a different situation. So I think we need to deal with payroll more systematically. And exhibit 18 says, where should we deal with payroll? And I've got a bias. My bias is, we need to think about the sales force big time. Exhibit 18 takes all the payroll categories that you have. Officers, owners, sales force, operations, and all other, backroom, etc. And they're 10.5%. You may recall that for my sample company, I made payroll 11%, because I wanted to round the number. The exact number out of the benchmarking report is 10.5%. Now, I could make a suggestion. Why don't we cut officers and owners' salaries? If I did that, you would come through the computer screen and try to strangle me. Notice the next line down. Sales force. Big number. Now, I am aware, because I'm not as stupid as you think I am, that you have products that have to be sold. But here's the reality. I just put a number on your screen, write it down. Half of your blooming payroll goes to the sales force. We need to get control of the sales force. I've got two vehicles to do that. Number one is, I need to go back and make sure every sales person is performing properly. We have an interesting problem in the United States. And that problem is, we need more sales people, because there are more sales jobs, than there are people who have selling skills. Selling is a brutally difficult job. And we need a lot of people. Most of the people out there who have selling skills have jobs they like, and sometimes we have to get marginal people. I need you to go back to your sales force, and this is a good time to do it, and say, who's not carrying their weight? I want you to train them, if possible. I want you to turn them. And people tell me, if I get rid of a sales person, I've got the cost of hiring somebody else. Yes, it's a one-time cost. If you've got somebody who's not carrying their weight, it's an every-year cost. If you have somebody in the warehouse who is a doofus, you can work around it. If you have somebody who's a doofus in the sales force, it costs you a lot of money, big-time money, every single year. I don't want you to become a jerk. It's not my goal to make you a tyrant. But I think we need to systematically look at the sales force and say, are we getting productivity from everybody that we'd like to get productivity from? Now, a lot of consultants who are smarter than me argue that we need a new sales model. I don't even know what a new sales model means, but as I understand it, it means the application of technology in place of labor costs. You've got to address that. I do not know enough about that issue to even say anything beyond what I just said. But we do need to say, can we bring technology to bear? Can we begin to get some of the sales costs, remembering that you've got products that have to be sold and we need people who can sell them? All right. I've got one more thing I want to do with regard to looking forward, and that is we need to look at our customer set. And again, this is data that's been done in industry after industry after industry, and it comes to the same conclusion every year. And that is you can take your customers and put them into four categories based upon how profitable they are to you, not how profitable they are in their business, how profitable they are to you. There's a group called high profit, which generates huge profits for you. There's a group called good profit that generates, ready for a clever term, good profits for you. And there's a group that produces some profit, and there's a group that you lose money on. The high profit folks, every time this survey has been done, which is probably 500 times by now, comes up with the same relationship every time. About 15% of your customers give you 100% of your profits or the dollar equivalent of 100% of your profits. They give you, to remind you of a number, $2 million. I've got another group of customers, about 15%, that give me 35% of my profits. I never see that because I wipe it off a little bit later, but that's what they give me. I've got some profits, about a third of my customers give me 10%, and then here's what is an incredibly difficult rub. About a third of my customers cost me 45% of my profits. I have a handheld calculator, and so I have brilliantly taken $2 million, multiplied by 45%, and say, they're only costing you $900,000. No big deal. We need to focus on those unprofitable customers. I would also, here's another one of my brilliant insights, I would suggest you go to the high profit customers and send them a Christmas card, because you're getting all your profit from them. We've got to deal with the unprofitable ones, though. And it's about a third of my customers. It's a huge customer base, and exhibit number 20 says, what do you do about it? Well, what's very trendy right now, and I hate it, is to fire them. I don't think that's a wise move, but I think there are probably about 2% of your customers, a very small set, that not only cause you to lose money, but they're proud that you do lose money. They're jerks. You need to fire them, but it's no more than 2%. The best way to fire them, as you probably already know, is just raise their price until they fire themselves out there. That leaves me, though, with a giant hunk of customers that we've got to change their behavior patterns. We've got to change how often they order, how many emergency orders there are, how many mistakes there are, how many everything that we have that caused us to have losing customers, and we've got to work with them. It's a slow process, but I think it's the way you go through life. All right, go to 21, because we've got to move with some dispatch. As you go to 21, I'll do my last reminiscing. I want to identify some free software. I've got some software that will help you, and my software is all simplistic software designed for upper management. Your CFO will barf when he looks at my software, but it's designed to help people who make decisions get answers quickly. Exhibit 21 says, my software is out there on my website, which is distperf.com. That stands for distribution performance project dot com. If you tab over to the programs tab and then scroll down to hand zone, you'll find a bunch of Excel files. The one you really ought to look at starting today is what if, and what if allows you to look at your business and say, what if we're forced to lower price X percent? What if sales go down X percent? What if we change this? You can change a whole bunch of variables and see what happens to your business. Your CFO has a similar Excel file that has 5,000 data points. All you have to do is enter data for the next two years, and you'll have an answer. Mine requires real simple. You get a quick answer. There's one on price cutting economics. If you recall that chart that had that curved line with those dots, you can reproduce this for your company. If you're wanting to sell your company, God forbid, or if you're wanting to buy one in a down market, there's business valuation, but I'll tell you right now, the ratios in there make no sense at all because this is an off the wall sort of world we're in right now, but it's there for normal times. Understanding the CPVs, we had that chart. I believe it had five graphs or five lines going across that graph. You can do that. You can reproduce that graph for your company, and then there's one called profit-first planning. I want to spend two minutes talking about profit-first planning. I want to change the way you plan. There's something called profit-first planning, and if you go to Exhibit 22, this says here's how we usually plan. We plan each year in our financial budget, start with sales, calculate gross margin, figure out the expenses, and we have a plan. Here's what's wrong with that. If we start with sales, subtract cost of goods to get gross margin, and then subtract expenses to get profit, profit is whatever is left over after you stop subtracting. It is a residual. What you need to do, and write this in Exhibit 22, if you would, please, the first thing you should do each year is figure out how much profit are you going to make. Let me tell you, this is probably the most controversial concept in distribution today, because people tell me, you cannot know how much profit you're going to make until you know your sales. My answer is, yes, you can, because if you plan your profit first, you can then ask yourself, how much do I have to sell to make that profit? What gross margin do I need to make that profit? What expenses do I need to make that profit? You can actually do that. It is controversial. A lot of people hate it. Let me tell you one more thing quickly and succinctly. People who use profit-first planning make a heck of a lot more money than those companies that don't. The proof is in the proverbial pudding. I'd like you to at least think about it. You don't have to do it, but let me go to Exhibit 23 and show you one exhibit, one single exhibit from that particular Excel file. It's entitled, Using the Profit-First Template. At the top, there's a little box that says, Goal 1, Plan Profit First. This is what it does. It says, Hey, plan profit first. Skip all the text. The text is just immaterial. Go down to the box at the bottom. The box at the bottom says, Hey, you have told me you're currently making $500,000. Your ROA is a crummy 5%. You need to do better. You plug in a number in the screen that's got yellow on it on your computer screen. You plug in any number you want to plug in. I plugged in $600,000. It says this is a calculation. This is how Excel is brilliant. That's a 20% improvement. It's going to give you an ROA of 6% if you don't change your asset base. Down below that, this is what is really crucial. I have had my brain surgically removed and put into Excel. Profit Guru says the following. That's my brain. Hey, that's a small change in ROA, puppy. You're sandbagging. A typical one-year change is between two to three points. It will tell you how much can you change based upon all the distribution work that I've been doing for the last 35 years. It's pretty good. I forgot to say one thing. I've got to say it right now. If you go to my website and download those Excel files, they will say to you, this is a password-protected file. You must send Big Al an email asking for the passwords. I will send you the passwords, and I will never, ever in my life send you another email. I will not send you sales material. I don't do business that way. I want to know how many people actually get off their duff and use the materials, or at least look at the materials. Let me give you a 30-second sales call, and then I will summarize what we said, hopefully succinctly. I wrote a brilliant book called Breaking Down the Profit Bearers and Distribution. It is actually a sensational book. Every manager who has P&L influence should read this book. All I'm asking is each person on this webinar buy 50 copies. It's available from Barnes and Noble and the hated Amazon. With that said, let's summarize what we said. We said about four things. Number one, we said we'd like to give you two ratios to understand where you are. One was a profit ratio, the break-even point. One was a cash flow ratio, the collection sensitivity ratio. We said calculate another 100 ratios to support that. The next thing we did was we said avoid the mistakes of the past. The big mistake is always price cutting. Try to avoid that. I know you've got idiot competitors that do not have any idea what they're doing, but try to offset that to the extent that you can. We also said that cutting accounts receivable was an iffy proposition in a down market, and you've got to make the decision between cutting accounts receivable to build up cash versus losing profit from lost sales. We also said do not stop buying. We then turned our attention forward and said going forward, we've got to get more sales without more payroll expense. Payroll is a big item in our business, and the sales payroll is the biggest. We suggested rethinking the sales payroll. We also suggested rethinking your relationship with customers. Finally, we said going forward, there are some free software out there to help you. I couldn't go any lower than free. I did the best that I could. With that, I hope you folks make a lot more money because you're nice folks, and you deserve to make more. Thank you very much for letting me be with you today. All right. Thank you, Al. If there are no questions, we'll go ahead and end the webinar. Just a reminder that the recording will be available shortly. If you do have any questions for Al, feel free to reach out to him directly. Thanks again.

financial challenges

down market

navigate

break-even point

recession

sales force

customer profitability

financial planning