PPB July 2015

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the health of a company and diagnosing any
potential issues.
Revenue Growth
The first and most common metric for
business owners to track is revenue growth.
While this metric is simple, it should still be
closely monitored. It is important to know
not only how much your company has grown
in the past year but how each year compares
with the previous two years so you can estab-
lish a growth trend. Many business owners
talk about how their companies have per-
formed over the past five years as an aggre-
gate total, but what really matters is the
breakdown from year to year. This trend
shows where the company is going and helps
business owners decide whether they need to
target new markets or focus more on cus-
tomer acquisition. In fact, as part of your rev-
enue growth, you should also set monthly
goals for customer acquisition. All companies
lose customers through no fault of their own,
so customer acquisition is a necessity to
achieve revenue growth.
It is also important to note how each
month compares to the same month for the
previous year. Understanding and tracking
these percentages will help you understand
how the sales cycle ebbs and flows for your
business, and makes cash shortages more pre-
dictable and manageable. The more you
understand the revenue cycles and trends of
your company, the better you will be at har-
nessing its potential.
Gross Margin Percentage
Gross Margin Percentage = ((sales - cost
of goods sold)/sales) x 100
While comparing revenue growth cap-
tures the potential of a company, the gross
margin percentage illustrates the quality of
the company’s sales and sets the foundation
for the overall health of the company. Gross
margin percentage represents the portion of
revenue dollars that are left over after any
direct product costs are incurred.
Direct product costs differ from company
to company. For a typical promotional prod-
ucts distributor, these direct product costs are
the cost of products bought from suppliers.
For a distributor that also provides screen
printing or embroidery services, other costs
come into play including rent, utilities, pro-
duction, salaries and production supplies.
Oftentimes company owners think they are
operating at a higher gross margin percentage
than they really are because they are not
including all of the costs necessary to produce
their finished products as direct product
costs. It is important to understand your
business structure and which one of these
models applies to your company.
The average gross margin percentage for
distributors in the promotional products
industry is 35 percent. If a distributor falls
too far below this number, it is very difficult
to make money unless the company is a
home-based business. A sales-minded owner
sometimes tries to sell more and thinks this
will help profitability issues. However, rev-
enue growth costs money in the form of
manpower, advertising and administrative
expenses. Therefore, in order to increase prof-
itability, the first place to start is the gross
margin percentage. Even at 35 percent, many
distributors are only breaking even. We rec-
ommend a gross margin goal of 40 percent.
There are only two ways to improve gross
margin percentage: increase prices or lower
costs. Distributors that have strong gross
margins generally offer creative and design
services that set them apart from the compe-
tition and allow them to acquire quality cus-
tomers based on credibility rather than price.
They also have strong relationships with sup-
pliers, and negotiate good pricing and dis-
counts for early payment.
Cash Flow
Average Accounts Receivable Balance
Collection =
Period Annual Sales/360
Once the sale has been made at a good
margin the job is done, right? Most people
have learned the hard way that is not the
case. The sale isn’t over until the cash is in
the bank. That means a company owner
needs to have a system in place to ensure the
timely collection of accounts receivable.
The first step is to establish a metric for
how quickly you expect to receive full pay-
ment. This number should mirror the terms
spelled out in your credit policy. If you don’t
have a credit policy, then develop one that
makes sense for your business and be sure the
terms are clearly communicated to your cus-
tomers. Customers cannot abide by terms
they aren’t aware of. The average collection
period for distributors in the promotional
products industry is 47 days; for suppliers it’s
Do:
• Institute a credit policy and ask your company’s attorney to review it
• Create a credit application and use it (again, ask your attorney to review it)
• Get credit references from customers and check them
• Engage sales and management in approving and supporting credit policies and
procedures
• Keep good records and notes of all communications concerning past-due
accounts
• Find a professional, certified collection professional to act as your agent
Don’t:
• Give open credit without doing your due diligence first and getting documents
signed
• Let customers run up balances beyond their approved credit limit
• Ignore a change in payment patterns, NSFs, increased disputes, etc.
• Continue to ship orders if your customer’s past-due amount grows without
explanation
• Lose touch with your customer and allow lines of communication to break down
• Make separate deals with a debtor once you engage a third party to help you
—Credit Decisions International, Ltd. is a PPAI business partner specializing in
business-to-business collections.
40 • PPB • JULY 2015 GROW
Common Do’s And Don’ts For Credit And Collections