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FMCG Gyaan and then some: Calculating Dealer ROI

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FMCG Gyaan and then some

Th u rsd ay , Ju n e 14, 2012 Follow by Email

Calculating Dealer ROI

This post is co-authored with my good friend Nishit Ganatra who is currently the ASM of Punjab, J&K for CavinKare. He interned with me at L'Oreal and graduated from XIM, Bhubaneshwar. He enjoys troubling the Pakistani army by attempting to cross over the border from time to time and is giving their economists nightmares as he contemplates to sell Chik shampoo across the border owing to the kindness of his boss.You can find him here. So probably the first thing that your distributor/dealer/stockist is going to tell you when you go to him for the first time is Sirjee, ROI nahin baith raha hai. What this simply means is that he is challenging you to calculate his return on investment. This is sort of a monthly exercise he knows that he is getting an ROI, else he would not be in the business. What he simply needs is some ego massage so that he gets an ILLUSION that he is in control of something when he is not your rates are fixed, your schemes are fixed, and so are your claims. While ROI is something that they teach us in first day of BSchool, calculating dealer ROI might be a different ball game altogether as he is a weasel who is going to try different permutations and combinations to get the better of you. Do this properly with him, and he (and you BDE/TSO who is twice your age but earns half as much) will respect you forever. The equation is simple Return/Investment, Return = (Earnings Expenses). The trick lies in realizing what earnings, expenses and investment involve & it is here where the dealer uses his tricks. Lets put down the formulae first: a. b. c. RoI or Return on Investment = Returns/ Net Investment Returns = Earnings Expenses Earnings = Gross Margin that the dealer enjoys (Usually 6% - 8% in FMCG companies) Expenses = Direct Expenses + Indirect Expenses 1. Here is where the first trick lies, Calculating Expenses:

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This arises from the fact that the dealer in question is not dealing with just 1 company, he instead has 4-5 or even more number of companies that he is dealing with. Hence there are some resources that he is exclusively using for a particular company for eg. Sales Man and similarly many resources that he is sharing among the companies eg. His godown space, accountant, supply units etc. Please note there is no thumb rule to it as there might be (and more often than not, will be) cases where even salesmen are being shared among 2 or more companies, and there will be one guy who would be the accountantcum-manager-cum-supply wala etc. This is where the concept of direct and indirect expenses comes in. Hence his expenses are split in to 2 parts i.e. Direct & Indirect Expenses Direct Expenses are those that the dealer incurs exclusively for the company concerned. And Indirect Expenses are those that the dealer incurs in totality for the companies for whom the resource/s is/are being shared. The only rule in calculating expenses is that you need to take into account the part of expenses that he is incurring for your company alone. We will see how we do it below.

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FMCG Gyaan and then some: Calculating Dealer ROI

Similarly the second trick lies in properly calculating the denominator, i.e Net Investment.

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A dealers investment comprises of 3 parts : Average Stock that lies in his godown, Average Market Credit that he extends & Average Claims Outstanding, Hence, Investment = Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding Here the usual suspect where one may go wrong in calculating Investment is the first variable i.e. Average Closing Stock of the dealer. A layman would take the month-end closing stock as the average closing stock for the dealer, or worse if you do the mistake of asking the dealer what his closing stock is, the beast would tell you a figure which will be his all time high closing stock in a month. The typical trend in FMCG is that majority of Pushing, also known colloquially as thokna (Primary) and Pulling (Secondary) happens in the last week and therefore the last week is not a true indicator of the entire months activity then why consider last weeks closing stock as his months closing stock. (To clarify, primary is what your company bills to the dealer and secondary is what your dealer bills to the retailer) Confused?, we will deal with it with simplicity. Consider this as the trend of Primary & Secondary for a dealer in a 4-week cycle of a month WEEK 1 2 3 4 OPENING STOCK 5, 00,000 4,50,000 3,50,000 3,50,000 PRIMARY 50,000 1,00,000 2,50,000 5,50,000 SECONDARY 1,00,000 2,00,000 2,50,000 4,00,000 CLOSING STOCK 4,50,000 3,50,000 3,50,000 5,00,000

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The above table is how a dealers inventory in a typical FMCG set-up would behave like, i.e. majority of activity happening in the last week and hence one would be wrong in taking 5,00,000 (Week-4 Closing Stock) as the average closing stock for that dealer in that month. The better way to do it is to take an average of all 4 weeks closing stocks. In this case it would come out to be as : ( 4,50,000 + 3,50,000 + 3,50,000 + 5,00,000) / 4 which equals to 4,12,500 which is lesser than the previous result and hence his investment goes down and RoI goes up. Enough of this gyaan now, let us get straight down to calculating a sample ROI Premise: Mr. Atul Mittal is the proud owner of his distribution firm M/S Bhagat Ram Jwala Prasad. His firm deals with distributing 4 companies in total of which ABC Pvt. Ltd. Is one for which we need to calculate the RoI. The firm has 1 dedicated (exclusive) salesmen working for ABC Pvt. LTd. with a monthly salary of INR 6,000/- per month per salesman. Apart from this, the firm also has an accountant-cum-manager with a monthly salary of INR 5,000/- per month, pays a monthly rent for the godown which comes to INR 5,000/- per month, incurs electricity & miscellaneous costs (supply units, chai-paani etc.) to the tune of INR 5,000/- per month. Other expenses such as his sons education and his daughters marriage which your dealer would want to include are not to be included. All figures are assumptions Monthly Business (Turnover) inclusive of all 4 companies: 20,00,000/-; Monthly Business (Turnover) of ABC Pvt. Ltd. : 8,00,000/ABC Pvt. Ltd.s Company Margin: 8% Average Market Credit for ABC Pvt Ltd. Is 10,000/- INR Average Closing Stock for ABC Pvt. Ltd is worth 2,50,000/- INR Average Claims Outstanding in ABC Pvt. Ltd. Is worth 10,000/- INR. Hence going by the formula: RoI or Return on Investment = Returns/ Net Investment Returns = Earnings Expenses Earnings = Gross Margin that the dealer enjoys (Usually 6% - 8% in FMCG companies) Expenses = Direct Expenses + Indirect Expenses

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FMCG Gyaan and then some: Calculating Dealer ROI

Lets calculate each element one by one: Earnings = Gross Margin = 8% of monthly turnover of ABC Pvt. Ltd. which is = 64,000/Expenses = Direct Expenses + Indirect Expenses Direct Expenses = Salary of Exclusive Salesmen = 1*6000 = 6000 per month Indirect Expenses for ABC Pvt. Ltd.=( Contribution of ABC Pvt. Ltds Turnover to Total Turnover) * Total Indirect Expenses Total Indirect Expenses = Godown Rent + Managers Salary + Miscellaneous Expenses = 5,000 + 5,000 + 5,000 = 15,000/Contribution of ABC Pvt. Ltds Turnover to Total Turnover = 8,00,000/20,00,000=40% Hence, Indirect Expenses for ABC Pvt. Ltd. = 40% of 15,000/- = 6,000/Therefore Total Expenses = 6,000 + 6,000 = 12,000 Hence Returns = Earnings Expenses = 64,000 12,000 = 52,000 Net Investment = Avg. Closing Stock + Avg. Market Credit + Avg. Claims Outstanding = 2,50,000 + 10,000 + 10,000 = 2,70,000 Therefore RoI = Returns/Net Investment = 52,000/2,70,000 = .1925 or 19.25%

Posted by Kaushik at 7:47 PM +1 Recommend this on Google Labels: Basics, fmcg, ROI, Sales

24 comments:
Anupriya June 14, 2012 at 8:50 PM Just a point here....when you look at his investment in stock - one should always check whether he has taken bank loan. if he has then his actual capital investment is actually only to the extent of his own money. rest is interest which is part of expenses. a lot of dsitributors conveniently miss out this part of the equation. and for big distributors this makes a big difference in ROI. Similarly, if the distributor has a good overdraft facility then he actually pays for the stocks to the company from that and not his actual investment. here again interest should be added into his expenses and the investment reduced by the overdraft amount. Reply Replies prashant April 25, 2013 at 6:59 AM That's a very important point... Reply

Kaushik

June 14, 2012 at 8:53 PM

Thanks Anupriya! Duly noted :) Reply

Kiran June 14, 2012 at 11:19 PM Alternatively, if a distributor rotates his investment say, 10 times a year, multiply that by net profit percentage per rotation. For eg: The company gives a margin of 5% on its products to a distributor. After all his distribution expenses, the net profit % is 2.1, and his investment is 20L with an annual turnover of 200L, ROI is easily calculated as under. No:of rotations = annual turnover/investment = 200/20 = 10 rotations/year Investment = 20 Lakhs This means he rotates his investment of 20lakhs, 10 times a year, each time making say 2.1%. So his ROI is 10*2.1 = 21% Reply

Kaushik

June 14, 2012 at 11:33 PM

Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also! Reply

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Sambhav Jain June 14, 2012 at 11:48 PM Very Well Explained.!Thanks Reply

FMCG Gyaan and then some: Calculating Dealer ROI

Ashish Shah June 15, 2012 at 12:05 AM Very helpful. A much needed initiative. Thanks Kaushik! :) Reply

Tirthadeep Dhar June 15, 2012 at 7:02 AM Brilliantly explained - Subbu and Nishit! I remember looking for somebody or something to teach me this, about a year back. That my dist. ridiculed me abt not knowing my ROI calculation was the 'push comes to shove' part. However, lets not forget a very important parameter of credit given by the company to the distributor which can range from 0 to anything. So if Credit = 7 days, 7 days of closing stock is deducted from the distributor's investment. Also a distributor gives a cash discount to wholesale or even retail, so that too has to be accounted for. I would urge you to simplify this and put it up as ur article is crisp and clear and this could prove useful too. Recommendation: 1) Teach them how to calculate a Super Stockist ROI as well. Far simpler than direct. 2) Also, in your next article you could explain how to get back an uninterested distributor on track based on key parameters. (Kaushik you had aced that, Nishit you could share too... btw sup with you?) 3)All distributors are swines with hair coming out of all their holes.. jusayin....they might not squeal but they do grunt a lot. Somebody has got to tell these kids that... Nishit you could elaborate I guess (this inference from ur fb statuses) And excellent explanation Kiran... was thinking abt that while reading the article. Cheers, TiTo Reply

Capt.Krunch June 15, 2012 at 8:52 AM hey TiTo, hw u doing man.... points noted dude....the upcoming posts will only highlight the point number 3 that u ve mentioned. may be we could come up with a post about how to tinker RoI to get back distributor's interest provided he is sitting on a lesser RoI... would urge you also to contribute...and about explaining credit, wholesale discount, we intentionally didn't go into the detail to avoid it from getting complicated... nevertheless thanks for the feedback. Cheers nishit Reply

Tirthadeep Dhar June 15, 2012 at 10:47 AM Sure would love to contribute... but I would rather start by trying and provide some comic relief between intense FM CG sessions :P Reply

Amber Verma September 26, 2012 at 7:15 PM Thanks All of you. re, amber verma Reply

Kapil Gupta February 8, 2013 at 4:26 AM

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Realy good explained ....Thanxxxx Reply

FMCG Gyaan and then some: Calculating Dealer ROI

Robin Godara Bishnoi February 21, 2013 at 9:46 AM thanks dear Reply

vibhor srivastav M arch 4, 2013 at 12:06 AM very helpful.....thanks....for explanation of ROI insuch a way.... thanks............. Reply

avik das M arch 20, 2013 at 10:51 AM Can anybody exactly explain followingper month Sales: 10 Lac M argin: 3% Inventory: 2.5 lac M arket credit: 2.5 lac Case 1: No credit from company to distributor Case 2: 7 days credit from company to distributor Case 3: 30 days credit from company to distributor Pls explain the concept also Thnx Reply

Ankit Dwivedi April 12, 2013 at 6:14 AM GOOD explanation......... but one doubt is there in example. ROI is 19.25%, as per calculation this is monthly ROI but monthly ROI would be 1.5-2.5% Reply Replies rajesh srivastava June 20, 2013 at 3:43 AM same doubt I have also. Could you plz explain it why. Reply

Ankit Dwivedi April 12, 2013 at 6:27 AM avik das...... if no expenses are there then case 1: roi is 6% case 2: roi is 7.2% case 3: roi can't calculate....... because there are no investment. Reply

Davidraja J E Sam June 15, 2013 at 10:32 PM hi Ankit could you please explain the second case.. David Reply

Rhishabh Surit June 28, 2013 at 11:32 PM davidraja.... if market credit is given for 7 days.. then average market credit would be 75% of inventory, thus total invenstment wud turn out to be 4.2lac.. hence ROI wud turn out to be 7.1% (guys plz correct if im wrong .. not from fmcg background) Reply

jjkljlj July 23, 2013 at 1:45 PM This comment has been removed by the author.

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FMCG Gyaan and then some: Calculating Dealer ROI

Munish Kaul July 23, 2013 at 1:52 PM aa you are very close to being right if market credit = 2.5 lac for 7 days market credit = 75% of inventory = 75/100*2,50000 = 1,87500 total investment would be = 2,50000+1,87500 =4,37500 margin is 3% of sale of 10,0000 = 30000 so, Return on investment is = returns/total investment ie : 30000/437500 which comes out to be 6.8 % or you can say 7% but how come you came to conclusion that average market credit for 7 days = 75% of inventory cost ??? Reply Replies Madhav August 11, 2013 at 2:46 PM I believe, he has not taken it as 75%..but..for 30 days..stock is 2.5 lacks..so for 7 days it's 2.5 lacs* 7/30~=58300....So net investment in inventory=2,5000058300=191700.....So, roi comes to be 6.7%..I think so...

chandan kumar bal September 10, 2013 at 1:24 AM Hi what is the healthy ROI for FM CG Distributors(as u told margin is between 6%-8%)? Is it between 14%-24%? Reply

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