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To sell management, use the language of numbers.

One of the toughest selling jobs the sales and marketing manager in our industry has is convincing top management that more direct salespeople are needed to accomplish the foundry's marketing objectives.

If a manager i s unsuccessful in this area, it probably stems from the fact that he doesn't speak the language of management verywell; he fails to convincingly state his arguments of how many dollars of new sales are necessary to justify the cost of adding another salesperson; where the break-even point is in putting another man on; and how many additional profit dollars can be generated.

The sales manager may feel quite confident that he clearly sees the need for additional sales staffing and that he can find the right person for the job. However, in most foundry operations self-confidence is not enough. Arguments that convince the president and treasurer have to be expressed in the language of numbers, dollars and percentage figures that affect profit objectives.

To state his case most persuasively, the sales and marketing manager should employ a simple formula to determine how much gross prof it can be generated in adding another salesperson. First, let's see how much one more salesperson increases annual fixed cost. In round numbers, salary, fringes and travel expenses of one salesperson should total about $70,000. No bonus compensation is included here because, presumably, such additional compensation would apply only to sales volume in excess of that budgeted.

If there is no change in the pricing of the additional casting volume generated by an additional salesperson, then variable costs-materials, direct labor and some energy costs-will remain about the same. For our purposes, let's assume these variable costs amount to 65% of total costs. This means that for every dollar of new business, 35%would be allocated to covering fixed costs. Breaking Even

So, to see how much added business it will take to break even, the marketing manager can use the following equation in which x" equals the volume of new business required to break even on the expense of hiring another salesperson. For purposes of this analysis, the foundry's current sales volume is assumed to be $8 million.

Thus, the break-even point would be $228,600. There are very few salespeople in medium-sized foundries who fail to generate at least this much new casting business in a year.

Now, suppose the boss says he is not interested in just covering costs with a new salesperson; he wants to maintain the present 15% gross profit figure. He may even consider this 15% a variable, like labor and materials, thus reducing the fixed percentage from 35% to 20%.

If this is the case, then we use the same equation as before to determine the amount of new business required to break-even and maintain the established profit level:

The new break-even point now becomes $400,000 in new business to be generated. But, in reality, the profit objective is exceeded, because the actual return is 17.5%. Here's how:

if your initial calculations indicate that the break-even point for adding a salesperson is too close for comfort, you should take another look at how the additional volume may result in lower labor costs, and so increase the contribution percentage. Perhaps the additional fixed costs might be reduced somewhat. Or maybe the profit margin could be dropped to 10%, which, although it serves to lower the overall profit margin, would produce more total profit dollars.

Foundries are a very volume-sensitive business. And the profitability of additional sales volume tends to be much greater than that of present volume because current foundry and administrative overheads are already being spread across the current volume base. Thus, for purposes of our calculations, we can assume that moderate increases in volume will affect only variable costs and have little short-term impact on plant and administrative overheads.

In your evaluation of the break-even point, keep in mind that we have been making our feasibility determinations based only on new sales developed in the current year. Actually, this substantially understates the long-term value of sales staff additions because each year's new casting sales are additive in terms of volume and profitability, and do not just affect sales for the current year.

Sometimes presidents and controllers can seem hard-headed when it comes to increasing fixed costs. This is precisely why well-presented numbers can turn a good idea into a convincing presentation.

COPYRIGHT 1991 American Foundry Society, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Marketing
Author:Warden, T. Jerry
Publication:Modern Casting
Date:Apr 1, 1991
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