Sales management and financial results are closely related. Financial results are stated in terms from two basic accounting formulas:
sales – cost of sales = gross margin
gross margin – expenses = net profit
Sales management influences the “numbers cranked into these formulas.” Sales, gross margin, and expenses are affected by the caliber and performance of sales management, and these are the major determinants of net profit. The cost-of-sales factor cannot be affected directly by sales management, but it can be affected indirectly since sales volume must be sufficient to permit maintenance of targeted unit costs of production and distribution. Periodically, these formulas become the company operating statement and are used by the board of directors, and by stockholders, in appraising top management’s performance. Moreover, top management uses these formulas in judging the effectiveness of sales management.
Sometimes, sales executives stress sales volume while neglecting gross margin and expenses. In these instances, even though sales volume increases, gross margin declines, expenses increase proportionately, and net profits are reduced. If these conditions prevail for long, profits disappear and losses appear. Often the best treatment for this situation is to shrink sales volume and expenses. Even with a lower sales volume, skilled sales management can reduce expenses and raise gross margin sufficiently to convert a loss into a profit.
It is also possible to err in the opposite direction and to overemphasize high gross margins and low expenses—because of a preoccupation with percentage relationships. Percentages of gross margin and expense are important, but sales management should be more concerned with dollar relationships. The important net profit is dollar net profit, not the percentage of net profit. It is a small consolation to have satisfactory gross margin and expense percentages if total sales volume and net profits are inadequate. Sales management should worry more about sales and profit dollars than about percentage relationships.
The company maximizes its net profits if it obtains an optimum relationship among the four factors. Sales management, both in its planning and operating roles, aims for an optimum relationship among the three factors it can directly affect: sales, gross margin, and expenses. Sales management works with others (such as those in charge of production and advertising) to assure that sales volume is sufficient to attain targeted cost of sales, the fourth factor.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.