AVDA members face an on-going challenge in trying to get everybody in the firm involved in improving profitability. Simply put, neither specific goals nor the means to achieve those goals is clearly understood. This article will address those challenges by looking at two issues.

• How Much Is On The Table?—Too often profit goals are couched in accounting and financial terminology. This article will bring them back into every day terms by looking at the profits given up by not working towards becoming a high-profit firm.
• Getting It Off The Table—It is difficult to determine what areas to work on since everything always seems to be important. This section will look at how much profit can be improved with selected management actions.

For years, the AVDA profitability survey has encouraged firms to think in terms of return on assets (profit before taxes divided by total assets). This is because return on assets (ROA) is the best way to measure whether a company is doing an adequate job of producing profits. ROA is wonderful as a strategic tool.

Despite the value of ROA, the concept is confusing for many people. It also doesn't translate directly into dollars of profits. Exhibit 1 attempts to clear up the confusion by looking at a typical and a high-profit AVDA member with the same level of sales volume.

The exhibit indicates that the typical firm has an ROA of 4.8% and the high profit firm has an ROA of 9.3%. Such ROA guidelines are extremely useful in thinking about the reward the firm produces in relationship to the risk being taken. However, most operating managers need to have ROA translated into a dollar goal.

Exhibit 1 also indicates that the typical firm has a profit of $2,550,000, while the high-profit firm of the exact same size has a profit of $4,500,000. In short, the typical firm is leaving $1,950,000 on the table. In thinking about making changes, AVDA members need to plan on adding that $1,950,000 to the bottom line.

There are lots of actions that AVDA members could take to improve results. The challenge is to understand which ones produce the largest profit for a given amount of effort. To understand that issue, it is useful to consider the following four potential changes that could be made with reasonable effort.

• Increase Sales by 5%—If this could be accomplished without an increase in overhead expenses, then profits for the typical AVDA member would be increased by $1,230,000. That would close 63.1% of the profit gap.
• Raise Prices by .5%—This would result in a profit increase of $720,000 or 36.9% of the profit gap.
• Lower Merchandise Costs by .5%—The profit impact from more effective buying is $597,000 or 30.6% of the profit gap.
• Reduce Overhead Expenses by 3%—If this could be accomplished without having a negative impact on sales, then profit would be increased by $661,500 or 33.9% of the profit gap.

While these results do not indicate which actions are the easiest, they do indicate the relative magnitude of their impact on profitability. Evaluating these options should give a sense of priority to AVDA members in planning for the future.

If AVDA members are going to reach their full profit potential they need to translate ROA goals into profit numbers so that everybody can help the firm move forward. Educating employees about how much has been left on the table and what can be done to take it off the table can aid that process.

About the Author: Dr. Albert D. Bates is founder and president of Profit Planning Group, a distribution research firm headquartered in Boulder, Colorado.

©2002 Profit Planning Group. AVDA has unlimited duplication rights for this manuscript. Further, AVDA members may duplicate this report for their internal use in any way desired. Duplication by any other organization in any manner is strictly prohibited.