One question I often hear from remodelers who employ salespeople is: “Where do I book sales commissions?” The simple answer is cost of goods sold (COGS), but the trickier question is: How will commissions affect total profitability?
Let’s look at an example. Assume that you, as owner/salesperson, sell about $1.2 million a year. A good salesperson could sell about half that during the first year, bringing company volume to $1.8 million, and reducing both gross and net profit percentages (see Scenario 1). But net profit dollars increase from $132,000 to $150,000. Not too shabby. But if “current” COGS goes up 5% (Scenario 2), causing gross margin to drop to 30%, the company appears to suffer a loss from the salesperson’s efforts.
The reason is that both scenarios assume that the additional 50% in volume will require support at the “current” overhead of 24%. But that’s probably not the case. If we assume that only half the overhead is fixed and the other half variable, the picture looks rosy again (Scenario 3).
Before you add a salesperson, fiddle with these numbers until the hire makes your company's bottom line more profitable.
—Judith Miller is a Seattle–based remodeling business consultant and trainer. remodelservices.com.