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Two More Tools to Ensure Better Profitability

(January 2006) posted on Wed Jan 04, 2006

Cost-to-sales ratio and sales-to-employee cost factor help managers understand their company.


By Marty McGhie

As I've discussed many times in this column, one of the keys
to running a successful business is having comprehensive
and accurate data at your disposal. While monthly financial
statements are the most common means used to review
the progress of a business, financial statements sometimes
don't tell you everything you may need to know.

This month, I'll identify two specific tools you can use to
provide some detailed feedback on specific company areas:
a cost-to-sales ratio, and a sales-to-employee cost factor.

The true costs of sales reps

Sales and marketing costs incurred by a business seem to
always represent a significant expense on the income statement.
So how do you know if you are actually making money
from your sales and marketing department?

If your company is like most, some sales reps will be making
you money while others will not. Choose to only review sales
and marketing expenses
as one line item off your
income statement, and you
may have a difficult time
determining the actual
expenses tied directly to
each sales rep. The amount
of sales generated by a
given sales rep will always
be the leading indicator
of his or her success, but
relying on only the monthly
revenue the sales rep generates
probably does not provide the whole picture.

The goal in this analysis is to gain a measure of the true
monthly cost of each of your sales reps, and compare that to
the sales they're generating. We'll call this our "Cost-to-Sales
Ratio."

Begin by accumulating all costs pertaining to each sales
rep. This includes: base salary, commissions, payroll taxes,
employee benefits, all expenses related to phones, computers,
auto allowances, travel, entertainment, and any other
related costs. Summarize these costs monthly, and then
divide them by the total sales generated during that month.
The result will be a ratio depicting how that sales rep has performed
during the month.


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