HOW DOES MANAGEMENT IMPACT THE BOTTOM LINE? – V

The charts featured below, while in their simplest form, will clear the air as to what is the most important item that affects the bottom line. In your next Management meeting you might want to ask attendees to rank the following three factors (sales, GP rate, expenses) as to their importance and impact on operating income (OI). This question will result in some interesting discussions due to managers varying rankings.

Is it any wonder why all our manufacturing started to be outsourced all over the world as increases in GP% caused the demise of quality and overshadowing of all the costs associated with outsourcing especially if done on a global basis. The higher the GP% the higher the Management bonuses – they were committed to their success and not the success of the Customer.

When business gets slow, most businesses layoff people and cut expenses because of the most immediate impact on the bottom line. With the cutting of expenses by 1%, our impact will be 1.5% increase in OI. With a 1% increase in sales, the Impact will result in a 2% increase in OI. Most often the resulting price increase will contribute to increasing sales, but at what cost, in terms of losing Customers, opening the doors to competitors and contributing to an inflationary environment. Lately, I have seen numerous large layoffs in the hundreds throughout industry as a result of increased M & A activity. Let’s buy losing companies where all the success has left, who’s fortunes have not fared well as a result of their inability to Manage. At this point recovery is painful, especially, in an environment of two different cultures where there is a winner and a loser – companies seldom go the M & A route if they both are successful and have in place clear plans for the future.

The lack of activity in key areas of developing new products; getting all hands on deck to serve as eyes and ears; conduct brainstorming sessions and benchmarking comparisons; analyze competition; evaluate present and future technologies; enter new domestic and global markets; develop aggressive new sales and marketing efforts becomes very evident as Management develops a fox-hole mentality and continues to work on maintaining and increasing their bonuses and negotiating attractive severance packages. Why would a CEO who was fired receive a severance package of $219MM?

You seldom hear of businesses committing to an increase in GP% with the exception of usually seeing an immediate increase in prices. It takes planning, innovation, commitment, and pride in the products, people, Customers and themselves.

HOW DO WE IMPACT THE BOTTOM LINE?

OI EFFECT
+1% 2.0%
+1% GP RATE 5.0%
-1% EXPENSES 1.5%

EXAMPLES:

QUOTA SALES +1% GP +1% EXPENSES -1%
SALES $ 100 101 100 100
GP RATE 52% 52% 53% 52%
GP $ 52 52.5 53 52
EXPENSES $ 32 32.1 32 31.7
OI $ 20 20.4 21 20.3
OI CHANGE + 2% + 5% +1.5%