A Dilemma for FMCG Companies?

Do we want sales only or profitable sales? To many of us, the answer to this question is no brainer; rather one may not consider this as a question since it is too obvious to him that everybody wants profit. However the reality in corporate world is not so straight forward due to a multiple forces impacting the business dynamics. Finance Director of some leading FMCG company, for instance, will be insisting on healthy bottom line without much consideration to factors leading to topline including pricing, consumer preferences and competitive scenario. Further, Head of Supply Chain of the same company will be pre-occupied with producing goods (and more importantly SKUs of his preferences) in order to improve overall yield of his plant which may (and does) result into huge stock of unsold inventory. However, you will find the Sales Director of the same company engaged in marathon sessions with his sales managers emphasizing on target achievement, interestingly, at any cost as he has to face hostile executive committee or board after every planning period.

Business Understanding of Sales Professionals

Even the senior non-sales associates raise questions about the business understanding of sales team members. It is generally assumed by non-sales professionals that sales associates are too focused on sales volume with no or little regard for strategic business needs. Finance colleagues generally complain that sales people fail to understand or appreciate even basic financial indicators which ultimately result into ‘push sales’ at huge cost to the company. This over-simplified version of so-called ´understanding issue’ is not completely justified particularly in view of aggressive sales targets and mad race for market share sponsored by senior management. One cannot expect sales team to appreciate the true financial implications of certain sales decisions when corporate expectations from Sales function keep on changing despite an agreed business plan. Sales Director knows that his presentation at periodic business review meeting will be quite smooth (read trouble free) as long as he delivers the volume. However, things may get quite problematic and such review meetings may turn into battle field in case sales targets are not achieved. In such a situation, we cannot expect Sales to be ‘profitability driven’; hence there is no meaningful discussion about profitable sales within the organization.

Business Planning or Sales Target

In view of apparently conflicting drivers for sales (or profitable sales), we need to understand various factors because of which sales team does not give much weightage to profitability while going for sales activities. One of the important reasons is the way how sales targets are arrived at and made part of Annual Business Plan. Even in companies having strong culture of extensive business planning, traditional methods are used for setting sales target with major emphasis on volume and/or value and ignoring critical elements like net sales revenue, discounting, emerging competitive landscape and the like. In the corporate corridors, I have seen many senior Finance managers urging their sales colleagues, in private, to go for volume even if aggressive price discounts are to be offered. Needless to say that marketing managers insist on gaining market share that in most of the cases impacts corporate profitability. 

Pricing Strategies

Pricing strategy being followed by FMCG companies in particular and other companies in general plays a critical role in overall profitability. Even in those companies where finance guys are not tired of delivering profitability sermons, one does not find robust pricing guidelines both in content and context that result into a culture where sales associates are not much bothered about bottom line. As a result of some number crunching by finance department during midyear, for instance, alarm is raised about the company going into red and out-of-cuff suggestions are made to revise (read increase) the prices without any consideration to brand building needs, prevailing prices or overall competitive outlook. Such ad-hoc approach for improving profitability cannot be sustainable and does not achieve desired results. Even at executive committee level, pricing decisions are taken without proper ‘buy in’ of Sales Director which ultimately may result into total disaster both for top and bottom line. 

Financial Viability of Sales Promotions

Another major contributor toward unprofitable sales is unfeasible sales promos and discounting.  Sales professional with reasonable understanding of financial numbers continue to be guided by short-term objectives since their performance is gauged by number of units they have sold instead of how much net sales revenue (NSR) they have generated. There are companies which give some weight to NSR in their incentive plans for sales team; even in such companies the major weightage remains for volume/value of gross sales revenue. Such an environment compels sales associates to ask for sales promos or special discounts which do not make financial sense and such unviable measures are rewarded through quick approval and huge incentives. In such a situation, who on the Earth will go for financially viable sales promos or discounting proposals when one can resort to easy selling?

Sales Manager or Business Manager 

Back-to-back ‘Finance for Non-Finance’ courses cannot create the right mind set among sales people if corporate directions and initiatives do not support them. Sermon sessions by senior management cannot force sales team members to start focusing on bottom line since overall thrust on market share, discounting policies and generous approval for unviable sales promotions suggest a different direction altogether. In these circumstances, sales managers cannot (and will not) act as business managers since they do not find any justifiable (to them) reasons to change roles. If companies really want their sales managers to act as business managers, then major shift in thinking on part of senior management will be required which will be reflected by taking tough decision about product pricing, realistic targets for market share, linking marketing initiatives with sales and the process of new product development (NPD). 

Inventory Management & Sales Forecasting

The poor quality of sales forecasting directly impacts the bottom line as evidenced by huge inventory levels of slow moving items and product shortage of fast moving items. An effective coordination mechanism among different functions is non-existent in most of the companies which may prove to be burden on financials. Small to medium size companies with limited access to working capital may find it extremely difficult to cope up with a situation where huge funds are blocked by way of undesirable inventory and there is stock-out of certain profitable products. Therefore, it is essential to have a robust system of sales forecasting as well as demand operational planning. Clear Key Performance Indicators (KPIs) need to be developed and post-period variance analysis is required for meaningful accountability of those responsible for sales forecasting. 

Key Accounts Management

Another factor which leads to unprofitable sales is poor quality of key accounts chosen mainly on the basis of so-called prestige factor instead of profitability. In order to attract ‘high net worth’ accounts, lucrative offers are made to certain clients which do not make any financial (or even business) sense. The model of key accounts in such companies may not be sustainable since they do not contribute towards profitability; rather they act as drain on resources. A meaningful and sustainable collaboration with genuine customers is beneficial for both parties; however, the sales team may lack ability to assess business leads and choose those ones which may not be profitable. It has generally been observed that sales team go after prestigious key accounts whose expectations are difficult to manage; such accounts once come under company’s fold prove to be burden on its profitability. It is therefore essential that sales team is provided with clear guidelines for lead generation, assessment and finalization of profitable proposition and customers.

Managing Accounts Receivable

In the absence of properly defined credit policy, sales team may push sales on credit to customer having poor payment history. Surprisingly, the credit extended to large customers generally become overdue and the recovery thereof becomes a challenge if proper follow up is not made. Another problem with credit sales is the determination of credit period; instead of starting the credit period from date of delivery, a number of big names ask for credit from the date of issuance of monthly statement of invoices at the end of month. Such practices convert a 30 day credit into a, say, 45 day credit. Sales team either does not understand the financial cost of longer credit period to parties already availing lucrative benefits or prefer to ignore the financial cost of such transactions. Matters become worst when sales team absolves itself of the responsibility of recovering overdue accounts receivable; any provision for doubtful debts impacts the bottom line and sales associates may not be fully aware of its implications.

The final Word

The factors mentioned above may be major factors impacting the profitability of company but there are other elements negatively affecting the bottom line. The fact of the matter is that only the sale associates are not responsible for non-profitable sales; company policies (or lack of), corporate priorities and degree of coordination may lead to such situation. The senior management should do more than lip service in order to ensure that sales team goes for profitable sales. Leadership team of the company needs to exhibit a bold and pragmatic approach for solving this issue.