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  • About Us
    • Nick Setchell – RealTime CEO
    • Vistage & TEC WorkshopsNick Setchell has been working with Vistage, the world’s largest CEO organization, since 2001.
    • NewsSee what’s happening with RealTime CEO.
    • Economic Update Report
    • Contact UsReach out to us. If you’re interested in booking Nick to give a keynote address or workshop at your conference, please include the date and location.
  • Concepts
    • Fiscal Focus Financial Statement AnalysisUnlock the hidden numbers in your P&L and balance sheet to see how you’re performing in 11 vital metrics.
    • Should We? / Can We?View, in real time, the actual financial impact of the hundreds of business decisions your team makes every month.
    • 24 Month Rolling ForecastingBlend your trailing twelve months with a rolling 12-month forecast to get a complete financial picture of your business.
    • J Curve ManagementTrack the number of investments you’re undertaking, the 3 phases of each, and the 5 rules for managing them.
    • Return on Operations – ROOView your return on operations percentage — your ROO % — the most powerful number to measure business success.
    • CEO Performance AnalysisBenchmark your performance as a private-company CEO against others in your industry.
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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?

Lever Impact – Scenario 1 Impact – Scenario 2 Impact – Scenario 3 Impact – Scenario 4
Price – – – –
Volume 10 1 10 1
DC – Wages 100k +Variability 100% 100k +Variability 100% 100k +Variability 0% 100k +Variability 0%
DC – Other Variability 100% Variability 100% Variability 0% Variability 0%
IDC – Wages Variability 0% Variability 0% Variability 0% Variability 0%
IDC – Other Variability 0% Variability 0% Variability 0% Variability 0%
AR Days – – – –
Inventory Days – – – –
AP Days – – – –
Fixed Assets – – – –

 

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.



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