Crystal Ball Example: Should we hire an additional Salesperson?

Should we hire an additional Salesperson?

In this scenario, we want to find out if it is worth hiring another salesperson at a cost of $100k. How much does the salesperson need to sell to make it worthwhile?

Assumptions made in this example:

• The salesperson’s wages are a direct cost.
• Volume increase as a result of hiring the salesperson is expected to be 10%, but we also want to stress test the decision at only 1% increase in sales.
• In scenarios 1 and 2, we are assuming a manufacturing or retail business where Direct Costs Other are materials and will increase 100% in line with volume (Direct Costs Other Variability 100%).
• In scenarios 3 and 4, we are assuming a service business where Direct Costs Other are not materials and so variability is set at 0%
• Indirect Costs Wages and Other variability is 0%.

Which levers will be affected?

Scenario 1: Expected increase in sales volume is 10% – manufacturing or retail business

Enter 10 in the Change % on the Volume lever assuming we increase sales by 10%, 100 (k) in the Direct Costs Wages and 0% Direct Costs Wages variability, 100% Direct Costs Other variability, 0% in the Indirect Costs Wages and Indirect Costs Other variability.

In this example, it is a Yes/Yes decision.  It increases Return on Operations and Operational Cash Flow.

Scenario 2: Expected increase in sales volume is only 1% – manufacturing or retail business

Enter 1 in the Change % on the Volume lever assuming we increase sales by only 1%, 100 (k) in the Direct Costs Wages and 0% Direct Costs Wages variability, 100% Direct Costs Other variability, 0% in the Indirect Costs Wages and Indirect Costs Other variability.

This makes it a No/No decision.

Let’s find out what the minimum volume increase needs to be to make hiring the salesperson worthwhile. Input various volume percentages until it is a Yes/Yes decision, leaving the other inputs the same as above.

The minimum volume increase needed to make hiring the salesperson worthwhile is 6%.

Scenario 3: Expected increase in sales volume is 10% – service business

Enter 10 in the Change % on the Volume lever assuming we increase sales by 10%, 100 (k) in the Direct Costs Wages and 0% Direct Costs Wages variability, 0% Direct Costs Other variability, 0% in the Indirect Costs Wages and Indirect Costs Other variability.

In this example, it is a Yes/Yes decision.  It increases Return on Operations and Operational Cash Flow.

Scenario 4: Expected increase in sales volume is 1% – service business

Enter 1 in the Change % on the Volume lever assuming we increase sales by only 1%, 100 (k) in the Direct Costs Wages and 0% Direct Costs Wages variability, 0% Direct Costs Other variability, 0% in the Indirect Costs Wages and Indirect Costs Other variability.

It is still a Yes/Yes decision.  Even if we only increased our sales volume by 1%, the salesperson would have a positive impact on ROO and Operational Cash Flow.