Tuesday 16 April 2013

Creditors pay £1bn for retail failures, enough said?

Creditors, such as suppliers and landlords, are likely to have lost more than £1bn from the retail sector's 20 biggest insolvencies since the start of last year, according to the credit information specialist Company Watch, just published in The Independent.

This figure obviously represents just the tip of the iceberg, in that many smaller retail business, often below the radar of suppliers have also gone bust over the same period, with the evidence available in the level of  boarded-up high street outlets.

But are we using the correct KPI?

Incremental sales as a measure of Threat or Opportunity
As we all operate sales-based business-models, our only access to wealth generation is via the net profit on sales made to third parties. This means that when we count the cost to us and the value to our business  partners, it is best to calculate the incremental sales of the sum given or received.

Thus the above loss of £1bn would translate into incremental sales of £10bn, assuming all suppliers had a net profit margin of 10%...a mean achievement for many, in the current climate.

Application to the role of the NAM
Apart from being responsible for the early warning when a customer is in difficulties (demands for more credit, cash–based incentive, lack of compliance….) the NAM is also the one who has to generate the incremental sales via other customers when the liquidator intervenes. (Can you imagine anyone else generating extra sales?)

A reflex-calc for NAMs?
For this reason it is vital that NAMs calculate their company net profit margin and factor in the resulting incremental sales requirement when ANY money is invested in a customer, whether via free credit, settlement discount, trade funding or deductions.

In other words if your company makes a net margin of 5%, you need incremental sales of £20k for every £1,000 invested in a customer… (£1,000/5) x 100, which needs to be  a reflex-calculation for every pound spent…

Incidentally, on the Opportunity side, your retail customer with a net margin of 2.5% needs to appreciate that every £1,000 you invest in their business represents incremental sales of £40k…more valuable than they think, in these uncertain times?

(For this reason we have added an automatic incremental-sales-multiplier for supplier and retailer to many of NamCalc’s 32 tools

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