It’s not uncommon for companies to go sales KPI crazy. After all, there are a number of ways a company could assess the value of a given sale. However, if there was ever one sales key performance indicator every company should use, it would most certainly have to be those benchmarks associated with reducing the company’s inventory and receivable financing costs. Why should companies use these two financing costs to measure the value of a given sale and the overall performance of their sales team? Simply put, these financing costs determine the gross profit on sales, and in today’s economy, these financing costs are substantial.
Inventory & Receivable Financing Costs as Sales KPI
Your company’s inventory financing costs have likely increased over the last couple of years. Granted, interest rates are at historical lows, but when customers miss payments, extend terms or default altogether, then it really doesn’t matter how low interest rates are. Either way, your company will be holding inventory for longer periods. Faced with the choice between having an open invoice with a customer who won’t pay, and retaining that inventory in house, most companies would opt to retain that inventory in house – especially given the number of delinquent customer payments that have become the norm these days.
Today’s companies aren’t merely concerned with inventory financing, but with also their financing on receivables. After all, those financing costs continue until the customer finally pays their invoice. In order to give you insight into these expenses, please consider the following tables below. They outline the inventory financing costs and receivables financing costs for a fictitious transaction. The company has accounted for their cost of capital, or cost of money, by taking their 9% yearly interest rate and dividing it by the 365 days in the year. Next, they take this daily rate and multiply it by their product line’s COGS (Cost of Goods Sold). This provides them with a daily financing cost of $6.658 for every day they hold inventory, and every day they wait for their customers to pay their invoices.
Inventory Financing Costs
Receivable Financing Costs
These tables are taken from the post: Strategic Planning: Reducing Inventory & Receivable Financing Costs
How Can You Measure These Financing Costs as a Sales KPI?
When a customer of mine questions the validity of these financing costs, or assumes they are just the cost of doing business, I always ask them to consider what it costs them in sales to generate a single dollar of net profit. Ask yourself the same question. How much revenue must your enterprise secure in order to get a single dollar of profit? This $1.00 rule speaks volumes of the efforts involved in generating profit. As such, every single dollar saved in financing costs goes directly to your bottom line. So, should inventory and receivable financing costs be used as a Sales KPI? Absolutely! Can you break down these key performance indicators into those territories managed by individual sales representatives? Most definitely! To help you, here are the critical steps to determining your financing cost on sales.
Step 1: Define Inventory Turnover Rates by Sales Territory
Every salesperson has an affinity for selling certain products over others. As a result, each territory has different inventory turnover rates. Those salespeople that sell inventory faster are able to reduce the company’s inventory financing costs. Those salespeople that sell products with longer turnover rates, increase those financing costs. Define the turnover rates by sales territory. Do this by product line linked to customer account.
Step 2: Define Each Sales Territory’s Receivable Costs
Next, define each sales territory’s average days on receivables. Granted, your sales team isn’t responsible for accounting or customer collections. Still, they play an important role in managing customer expectations. As such, they are often called in to help clear delinquent customer accounts, and in setting up new accounts.
Step 3: Establish Sales KPI and Benchmarks by Territory
Your final step involves setting up benchmarks and objectives structured around reducing these financing costs. Why do you need to do this by territory? Simply put, each sales territory is different and some salespeople may generate high gross profit with large customers, ones that require contractual agreements on supply and extended terms. Therefore, measure your financing costs sales key performance indicators by territory. For instance, those two aforementioned tables show the costs of financing inventory when it’s held for 90 days before it’s sold, and the costs of financing receivables for an average of 60 days. This territory's objective could be to reduce it from 90 to 60 days on inventory, and from 60 to 45 days on customer payments.
Today’s enterprises know the high costs of financing. Customers are becoming more and more delinquent in paying their invoices. It’s just a sign of the times and means your company must adjust how it measures your sales team’s performance. To do that means you must come up with sales KPI that measure the impact of these financing costs. Define your costs to finance inventory. Define your costs to finance receivables. Do these two steps by territory and then put a plan in motion to reduce these costs over time. Remember, every dollar saved goes directly to your bottom line. To read about how to further analyze a given sales territory, please read: Sample Sales Territory Gap Analysis Excel Sheet With Pie-Chart
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