Using Profitability Algorithms

calculator-1180740_640Did you know that you can translate what your staff does into how the company makes money? This can be done for any company in any line of business. It is a profitability algorithm, which converts staff productivity and efficiency values into sales and margin.  With this in hand, one only can subtract fixed costs and arrive at the company’s bottom line profit.

Having this information enables companies to focus in on areas that are performing well and those that need improvement. Thus, one can zero in on those specific items where improvement is needed. In some cases, you might need to make tradeoffs to maximize results, such as sacrificing higher bill rates to get more volume, or reducing margin rates to get more orders and a higher fill ratio. In all cases, the idea is not to increase one item be it bill rates or margin rates, but rather to maximize margin $ and overall profit.

For example, if a sales rep has 200 sales conversations a week, that would be a productivity number. If 20 job orders came out of those conversions, that would be an efficiency value of 0.10. If 4 of those orders resulted in a sale, that would be a 0.40 fill ratio. If those orders generated $200 each and the margin rate on those orders was 33%, then that sales person would generate $800 in sales and $264 in margin per week, or $1,056 in four-week month. If there were 10 sales reps, this would generate $10,560 in margin on sales of $32,000. If the company’s fixed cost was $9,000 this would result in a profit of $1,560 and a return on sales of some 5%.

With this information, you can figure out the best structure for an individual deal, create a profit plan that can explore your best options, set up a win-win commission plan for their rep, etc. Let’s take the example above. If sales calls increased by 5% and all other things remained constant, profit would increase to $2,616 from $1,560. Alternatively, you could work on trade offs. If margins were reduced by 3% to become more competitive and fill ratios rose by 10%, they would generate $3,400 in monthly profits. This same concept could be applied to most job functions or processes.

Michael Neidle

Michael Neidle
Michael Neidle is president and CEO of Optimal Management, an advisor to staffing firm owners and managers.

Michael Neidle
Michael Neidle is president and CEO of Optimal Management, an advisor to staffing firm owners and managers.

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