This time, Inamori* spoke about the above motto in his book : Practical Accounting -Business Administration and Accounting -.
What Inamori said is quoted with “”.
Question: “ We are a car dealer company, tell me tips on upfront investment to double the number of sales staff.”
Answer “ You must take a chance, but indirect personnel must be thoroughly reduced. Maximize sales and minimize expenses for each department to generate more profits.”
Here, Mr. Inamori explains the reason why we must keep this motto in making upfront investment.
The reasons are as follows.
1. Improve the net profit ratio
2. Minimize the cost for back office staff and fixed cost
3. Implement the amoeba accounting system
Let me explain one by one.
1. Improve the net profit ratio
” Looking at your business performance, sales have increased this year, but the profit margin has been decreasing little by little, falling below 5%, I found this to be risky. If you think that expenses must increase as sales increase, the actual expenses would increase more than you expect. Therefore, we must be careful even if the profit has increased. We must seriously consider the decline in profit margins as a major problem. Your goal should be to make at least 5% profit. It would be a problem if the profit margin was declining before making the upfront investment of hiring new sales forces.”
→We naturally think that doing something new always costs money. I believe that it is necessary to minimize costs and expenses, and to thoroughly minimize expenses. The minimum prerequisite for a company to tap the upfront investment is keeping 10% of profit.
2. Minimize the wage for back office staff and fixed cost
” Based on the data, there are 15 salespeople in an organization of 50 people, so 30% are salespeople. In other words, one salesman needs to earn the sales at least to support three people including himself. To address this, the company plans to increase the number of salespeople, doubling the number in four years. In this case, it is important not to increase the current number of middle and back office personnel at all. If we decide to increase only the number of salesmen, then let’s assume that in case you hire young new graduates and they only earn their own salary, which is equal to the sales of 10 units a year. The question is how long it takes for each salesman to sell 10 cars a year. Until they reach that level, you won’t even be able to reach even the breakeven points. This would impact the total profit. You must first examine whether your current net profit is sufficient to support the wages of new sales forces. First of all, you should avoid hiring people who are going to be an unreasonable burden just simply because of doubling the sales. You should hire new people as long as your cost structure allows. I don’t know how long it takes, but when each of those people sells an average of 30 units a year, the profit margin should improve significantly. Since the number of indirect personnel has not increased, a new employee, who can generate sufficient revenue, would not erode the profit. Moreover, once they have got to sell 30 units, the entire salary of two sales forces becomes profit.”
→I wonder what kind of measures are needed to avoid increasing indirect costs. I think this is a matter of ingenuity and an issue that the entire company must work on. Thus, I feel we must make a profit and analyze based on numbers.
3. Implement the amoeba accounting system
” Rather than just cutting costs, I think we should calculate the profitability of each store and make all employees, including store managers, pay close attention to maximizing sales and minimizing expenses. I think maintenance services have their own income as well. We should think of it as more than just an indirect department that provides sales assistance. In some cases, if a used car center is established that separates maintenance services and sales, the profitability structure will be different from that of new car sales. So, apart from that, I think it is extremely important for management to keep a close eye on the profitability of each business.”
→We, management, must understand the profitability of each department daily. We must create such a system and to share the philosophy in our company, while also seriously working on profitability, especially minimizing expenses.
In summary, when making upfront investments, I feel that carefully checking the current profit margin, not increasing fixed costs, and thoroughly reducing expenses by department will be the key to taking business opportunities.
Further queries or doubts, please email to ytomizuka@abrilsjp.com
News Letter subscription is here
