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Assume a Pro Forma Income Statement to project income and breakeven sales for the first year in the business and the following ratios for each $100 (average sales mix) Net Sales:
|Pro Forma Income Statement||Dollars||%|
|Gross Sales (Suggested Retail)||$166.67||166.7|
|Wholesale Discounts (40% Retail)||66.67||66.7|
|Net Sales (60% Retail)||$100.00||100.0|
|Product Costs (12% Retail)||$20.00||20.0|
|Distributor Commissions and Royalties:
|Override Royalties (10.5% Retail)||17.50||17.5|
|Leadership Royalties (9.5% Retail)||15.83||15.8|
|Other Bonuses and Trips (4% Retail)||6.67||6.7|
|Commission Expense (24% Retail)||$40.00||40.0|
|Variable Expenses (36% Retail)||$60.00||60.0|
|Gross Margin (24% Retail)||$40.00||40.0|
Since this Pro Forma reflects a Gross Margin of 40% we need to determine our breakeven sales.
Note: This is a simplified projection because some variable costs have been left out (like freight expense). However, we will assume that Freight Revenue covers the cost and this is our first high level projection.
We estimate that our fixed costs for the year will be $500,000 (salaries, benefits, rent, and other period costs).
In order to determine breakeven Net Sales we divide the $500,000 fixed costs by the 40% Gross Profit Margin and determine the breakeven sales to be $1,250,000 which can be tested as follows:
|SG&A (Fixed Costs)||500,000||40%|
|Net Income (Breakeven)||$0||0%|
Obviously, before we do a Balance Sheet and Cash Flow Projection we test the reasonableness of breakeven sales and fixed costs. Based on average sales per customer, and industry turnover, we can determine how many Distributors we need to recruit to hit our sales projections. These are very KEY PROJECTIONS! Once the company reaches the Net Sales figure the net profit goes to 40% (within a reasonable range of sales and fixed cost).
Many start-up companies will copy other company agreements including their commission breakage rules and annual fees. DON’T! For one thing, it cost more than most annual fees (studies have shown 5 times more) to get a new customer. Distributor turnover or new recruit fees normally takes care of most of the annual cash flow lost by not charging annual fees to ongoing customers.
Studies have also shown that breakage on base commission (required sales volume to qualify) can cut average order volume by almost 2/3. Don’t be penny wise and pound foolish!
As we’ve said in other articles we would be better off if the Suggested Retail Discount is 50% (instead of 40% in this projection) because of sales psychology. Use the maximum Distributor commission schedule to do initial projections to eliminate any possibility of understating commission expenses. Remember, commission expense is a percentage of net sales and you want the best you can afford to attract the top Distributors. Reputation and Character are your most valuable corporate assets (word gets around).
If you can get past Breakeven Net Sales you will attract Distributors that they can’t attract. The Keys to Network Marketing companies are:
- Net Sales
- Fixed Costs
NEVER DRAG NET SALES!
If you can attract recruits (and get past Breakeven Net Sales) you have accomplished your major start-up objectives!