I'm Making Lots of Sales, Where's The Cash Flow?

Does your pricing cover all your costs?

“Our sales have shot way up over the last year, but I’m still not making any money! On paper, it looks like all these projects are profitable, but there’s no money in the bank. Where’s the cash going?”

This plaintive cry was raised at a recent Business Group meeting by a small manufacturer of specialty products. When we questioned her on her costs for particular sales to large retailers, she listed all her Cost of Gods Sold, Direct Labor, and so forth, and it looked like she had a decent margin. But as we looked closer, we saw a number of costs related to these particular sales that were not included as direct costs, and were just hidden away in “Overhead.” Such things as cost of the showroom in Dallas (which she wouldn’t maintain except to sell a particular line), returns and breakage, samples and demo products, un-reimbursed shipping, some sales commissions for reps and brokers.

When we applied the appropriate share of these costs to those particular product lines, the margin dropped to a sliver. Huge sales, on which she was relying to be an engine of profits for the year, were scarcely doing more than covering their own costs.

What is “sales overhead?” Out of this discussion, we came up with a category of costs which I call “sales overhead,” that is, costs that don’t relate to any particular sale (so they’re not exactly a cost of goods sold) but that would not be incurred if particular kinds of sales weren’t made, like those listed above. This sales overhead stands between costs of good sold and general operating overhead.

So back to our plaintive member. When we applied this sales overhead factor to various kinds of sales she made, she could quickly determine the true cost of making these sales and then calculate the price needed to achieve her desired margin. She saw where she had to raise prices, and where she’d have to cut costs to achieve a particular price point.

Apply this to any business. We had all the members of that Group do this exercise, including service businesses, contractors, and others. It was very illuminating. A consultancy found that a particular business conference applied only to one type of project, and that the projects were never profitable enough to recover the cost of that conference. A general contractor found that jobs below a certain size never made money, because the “running around costs” were as high as much larger projects.

Calculate your own “Sales Overhead.” If you’d like to learn the items we included in sales overhead, send us an email and let us know a little about your business.

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