COST OF SERVICEGoing Beyond Gross Margin

TELL ME AND I’LL FORGET,

TEACH ME AND I’LL REMEMBER,

INVOLVE ME AND I’LL LEARN.

- BENJAMIN FRANKLIN

AGENDA

BASIC MATH OF SERVICE

FOR A CUSTOMER

1 2 3

OTHER FACTORS IN

COST ANALYSIS

OTHER FACTORS TO CONSIDER

BACKGROUND

KEVIN STINNER, CCE, CCRA

CREDIT MANAGER | PINNACLE AGRICULTURE

12

YEARS IN CREDIT & COLLECTIONS

2015 NACM GATEWAY REGION

CREDIT EXCELLENCE

2017 NATIONAL EMERGING LEADER

PRESENTER, WRITER& THOUGHT

LEADER

BASIC MATH OF SERVICE FOR A CUSTOMER

1

AS BASIC AS IT GETS

(EBITDA)

(NIBT)

DRILLING INTO THE BASICS

WIDGETS SOLD TO CUSTOMER

$1000

COST OF WIDGETS

$800

GROSS INCOME

$200

OPERATING COSTS

$150

YOU MADE

$50

RIGHT?

NOT NECESSARILY

TAKE CUSTOMER OUT TO LUNCH

$35

6 MONTHTERMS

$35

DELIVERY EXPENSES

$70

COMMISSION

$50

ACTUALPROFIT

$10

HIDDEN COSTS IMPACT YOUR BOTTOM LINE

GROSSPROFIT

$200

WHAT OTHER FACTORS SHOULD GO IN TO COST

ANALYSIS?

2

OTHER CONSIDERATIONS

COST OF CAPITAL

CUSTOMER’S RISK OF DEFAULT

POTENTIAL LOSS OF OTHER BUSINESS

SELLING EXPENSES

WHAT IS YOUR COSTOF CAPITAL?

What is cost of

capital?

Why is it important?

What about finance

charges?

Is there always an expense with it?

How do you

calculate it?

WHAT IS THE CUSTOMER’SRISK OF DEFAULT?WHAT COSTS SHOULD BE CONSIDERED FOR THAT?

Reserve for bad debt expense

How can you calculate it?

Specific reserve

Other considerations:TERM ACCOUNTS | B & LOWER ACCOUNTS PAST DUE AR | CREDIT CARDS

WHAT IS POTENTIAL LOSSOF OTHER BUSINESS?

Competitors

Unable to serve everyone every

timeSelling more

than you can get

SELLING EXPENSES

How are you recouping these expenses?

Can you offer more entertainment than the customer will spend?

(MEALS, ENTERTAINMENT, TRAVEL, ETC.)

Who all should be considered with the travel expenses?HINT: IT’S NOT JUST THE SALESMEN

OTHER FACTORS TO CONSIDER

3

LOSS LEADERS

What is a loss leader?

When is it OK to use a loss leader?

How can loss leaders backfire?

REBATES

How are rebates accrued?

Are rebates accrued accurately?

Are rebate numbers correct? (extra rebates)

How are rebates affecting your cost of goods sold?

SALES SPIFFS

How are you accruing for the spiff when hurtles are put in place?

How does all this build in to your total cost of business with the customer?

How many salesmen will hit the hurtles, and how much will this cost?

EXAMPLE: 50,000 widgets at $100 each paying 7.5%=$375,000 + $20K for a trip to Cancun

What are sales spiffs?EXAMPLE: 10,000 Widgets sold = additional 2.5% in commission

50,000 Widgets sold = 7.5% commission plus free trip for 2 to Cancun

WRAP IT UP

3

IS A CUSTOMER REALLY PROFITABLE

TO THE COMPANY?

CUSTOMER MARGIN PROFIT

Also need to consider:

• Cost of all services for the customer

• Other costs associated with the customer

WHAT CAN YOU DO?

DO ANALYTICS

HAVE POSITIVE

SOLUTIONS

KNOW YOUR

AUDIENCE

SPEAK UP BE PREPARED FOR

OBJECTIONS

WILL YOU BE A HERO OR A VILLAIN?

Have your data ready, and be sure of your numbers

Be prepared to handle objections

Bring it to light, but don’t expect to be a hero

At first, you will be attackedEXAMPLE: “He is our best customer; how dare you question his profitability?”

Know what sword you’re willing to fall on

When first you don’t succeed try, try again

QUESTIONS?