Why do profits go down when you take on a new salesperson?

Why do profits go down when you take on a new salesperson?

What should business owners consider when bringing in a salesperson?

Ensure you make time to plan, interview, set targets and train your new salesperson. 

You’ll also need good systems and processes to capture the information your salesperson generates in a Customer Relationship Management System (CRM). Use this to monitor performance and provide you with information about leads, quotes, orders etc, which protects you if they are ill, on holiday or leave your business.

You have to ensure that that process is robust enough that the sales information is with you, not the salesperson. They have access to it, but it needs to be your information. 

What is the true cost of employing a salesperson?

First, work out the total cost of the salesperson, which in addition to their salary, includes:

  • bonuses
  • employers national insurance on salary and bonuses
  • employers pension contributions
  • other benefits in kind like life insurance
  • total vehicle costs or mileage
  • any other travelling expenses
  • accommodation and meals whilst on business
  • any extra marketing and exhibition costs
  • extra entertaining
  • other overhead costs such as software, admin support and extra financing

Often these costs on the gross salary increase it by 50 to 100%.

Next you must understand what average gross margin percentage you expect on their sales.

Then you need to work out your minimum sales target by dividing the total cost of the salesperson by the expected gross margin percentage.

Finally, check that the sales targets you set are realistic. Where will these sales come from and what markets will you target?

Worked example: costs

We advised a client where the salary was £40,000. Here are the additional costs:

  • £7,000 national insurance, pension, benefits
  • £15,000 fully expensed car, including lease, repairs, insurance and fuel
  • £10,000 accommodation, meals, entertaining while travelling on business
  • £6,000 extra sales, marketing, exhibition costs
  • £2,000 extra overhead, admin, finance and software

The cost increased from a gross salary of £40,000 to a total cost of £80,000, which really surprised the client!

Worked example: extra sales needed

The client then needed to understand what sales are required to as a minimum to cover that salesperson’s cost of £80,000.

To do this you’ll need to know the expected gross margin, which is your sales less the direct cost (not overheads). In our example above, the business anticipated a gross margin of 25%. This means that for every £100 sale, there were direct costs of £75, and a gross profit of £25.

To work out what extra sales they needed, we divided £80,000 (the total cost of the salesperson) by 25% or 0.25 (the gross margin percentage). 

This gave a target of £320,000 extra sales needed as a minimum. This is before considering how long those extra sales take to come to fruition.

Worked example: what actually happened?

The business owner was surprised by the figures, as they thought a salary of £40,000 with targetted sales of £300,000 would be a good investment until we showed them otherwise.

They asked us to meet the salesperson to see if we could agree and set realistic targets. Together we reduced expected costs from £80,000 to £65,000 by focusing on a closer to home target area which reduced exhibition, travel and accommodation costs. The salesperson felt they could hit at least £350,000 and agreed a bonus scheme if they sold more than that.

In this example, the salesperson wasn’t doing the pricing so they couldn’t offer discounts, meaning the gross margin wasn’t likely to drop below 25%.

How did the new salesperson work out? The first salesperson lasted six months as their sales were low, and pipeline poor which was clear from good monitoring systems. They left and the client used the same method to recruit again, having learnt a lot during the process. We’re delighted that the outcome was good, and that sales have increased by over half a million pounds.

Thinking about employing a sales or business development person? What to do now

Firstly, you must ensure that you have enough time to plan, recruit, interview and monitor the salesperson. Most business owners are flat out dealing with staffing issues, supply chain delays, inflationary pressures, uncertainty about the future, but it’s vital to set aside time.

Secondly, you must ensure your systems and processes are good and robust enough to capture and secure the information collected by the salesperson. That means you can also monitor performance, and be in control if something unexpected happens, such as illness etc. Remember, the information is yours and it needs to be secure.

We all hear rumours of salespeople moving around and taking the information with them. Some do, some don’t, so make sure you have access to that information whenever needed, so you can follow up on those leads, enquiries, quotations, orders etc.

Thirdly, work out the true cost of the salesperson, before setting sensible targets based on the total costs, divided by your gross margin percentage. That way your business has the  best chance of increasing its bottom line.

We’ve all heard “turnover is vanity, profit is sanity, cash is reality”.

Businesses don’t go bust if they’ve got cash.

It’s such a changing, uncertain and lonely world, business owners need to ensure they have good management information systems and support, so you get the right information you need to make the right decisions to grow your business profitably.

Could you sell more instead of employing a salesperson?

Often the business owner is the best technical salesperson. Not only do they know the business, they’re passionate about their business, so they’re a great person to be selling.

Do you want to take on other staff to free up your own time for sales and business development? Make the same calculation (the total cost of extra staff divided by the gross margin percentage) to see what sales you would need to make.

Next step?

If any of this is resonates with you, get in touch and we’ll set up a time to talk. Alternatively, you can book a Business & Xero Review for a fixed low fee.

Book your Business & Xero Review

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