In 2019, many dealer bosses I know from across the country called me, mostly saying that business is getting harder and harder. The most frequently mentioned issues were rising costs and stagnant overall profits; some said that brand tasks, especially new product promotion tasks, were difficult to complete, leading to annual losses of over a hundred thousand or even several hundred thousand yuan just from handling defective and near-expiry products; others mentioned difficulties in managing staff, poor performance, and increasingly difficult financing. These various reasons have left most dealers confused, anxious, content with small wealth, living day by day, waiting for retirement, complaining but lacking internal drive and unwilling to change. Coupled with the pandemic, many dealers with single channels or single brands have encountered unprecedented bottlenecks and crises. Many dealers either feel helpless, watching and sighing, or recklessly dump goods at low prices, or even face more severe situations like broken capital chains and key staff resignations, but few calmly organize research on how to respond to emergencies. The root cause of these situations is that many dealers find that even if sales reach predetermined targets, profits are minimal, and some dealers don't even have an accurate understanding of their own profitability. In short, they work hard but don't make money. The deeper reason is that many dealers don't even understand their own company's operating conditions, unclear about key sales indicators and expense indicators. In such cases, even if they know there are problems in their company's operations, they can't solve them because they lack the ability to identify problems. Today, we'll discuss the first step for dealers to increase revenue and reduce costs to improve profits, which is also the foundation: how to understand your own operating situation—self-profitability testing. -01-

The Importance of Self-Profitability Testing

Now many dealer bosses pay great attention to their health, having regular check-ups every year, checking blood sugar, blood lipids, blood pressure, liver, etc. After the examination, the doctor tells you what your indicators are, what the standards are, and which aspects have problems that need attention or treatment. The results are a bunch of data. Dealer bosses know to have regular physical check-ups, but do you regularly check your business? The self-profitability testing I'm talking about today is like giving your business a check-up. In the years of operation of every dealer company, there are more or less hidden problems. Experienced dealers can roughly sense that something is wrong in a certain area, but they don't know how to solve it. Because these dealers who rely on experience cannot accurately understand the root cause and details of the problem. Some dealers know the importance of self-profitability testing and conduct regular self-checks. Through the data obtained from self-checks, they can diagnose problems in their own operations, find the symptoms, and prescribe the right medicine to solve problems. This is the important role of self-profitability testing. For example, in a company I analyzed (referred to as "Company A"), at my suggestion, they conducted a profitability test and obtained many useful data. Their business scale reached 50 million yuan in 2019, but net profit was only 1.27 million yuan, including 500,000 yuan in manufacturer support fees, meaning the company's actual profit was only 770,000 yuan, with a net profit margin of only about 1.5%. Through cost and profit data analysis, the boss found that the company had previously set detailed profit targets and standards, but in actual operation, although the gross profit margin of 9.8% barely met expectations, the expense ratio exceeded the planned 7.5%, reaching 8.28%. By breaking down the data and combining it with their own operating conditions, he easily identified some company difficulties, such as unnecessary expenses, additional taxes due to unprofessional finance, and financing issues. Subsequently, he said that with accurate data diagnosis, the company would adjust accordingly, expecting net profit to increase by more than 400,000 yuan next year. This is the role of self-profitability testing; data is the most intuitive inspection tool. Without this data, dealers might not even know how much their company earned in a year. Do you think such a company has a high probability of making more money? With the development of the times, the FMCG industry is almost a red ocean market, with at least 3-5 brands competing in every category. In such a situation, dealers face increasingly fierce competition, and their own problems gradually emerge. Personnel become harder to manage, talent is hard to retain, sales decline, costs rise, profit margins drop, or even losses occur. As I just said, every dealer's business journey has more or less serious problems. When you don't have regular self-checks, these problems persist because you can't even determine where the specific problem lies, and blindly adjusting based on experience and feelings can sometimes backfire, making the company worse. Self-profitability testing can be said to be the prerequisite for solving problems in dealer operations. It helps you identify problems in your business operations, understand your own operating conditions, and let you know more intuitively how much money your business made and why it didn't make more. In simple terms, self-profitability testing is a tool that turns your business into a bunch of numbers presented before you, allowing you to see your company's operating conditions intuitively.

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The Four Elements of Profitability Testing

After understanding the importance of self-profitability testing and data, let's sort out what aspects need attention in this profitability test. Actually, it's like our physical examination: regularly test to get data, then compare with corresponding standards, and finally diagnose the problem. Business profitability testing is the same. Today I'm talking about strategic theoretical methods, the big direction, mainly focusing on four aspects. 1. Testing Items First, clarify the testing items. Since we need to use data to improve operations, we must understand what data we need and how to calculate some data. Now I'll tell you from a big-picture perspective how to conduct self-profitability testing. Since it's a profitability test, sales revenue, gross profit, total expenses, and net profit are the most basic data; they directly tell you your profitability. There are also other indicators worth noting, such as the first formula below, which marks the break-even point. When your data meets this formula, your company starts making a profit; it helps you draw a profit red line. For example, during the pandemic, our Hongye Hengda had monthly expenses of over one million yuan, which translates to daily expenses of 56,000 yuan. That means if our average daily gross profit doesn't reach 56,000 yuan, we're losing money. The next three indicators—gross profit margin, net profit margin, and expense ratio—are also basic data to help you understand your company's profitability. You can make preliminary judgments on pricing, whether to optimize expense management, etc., through these data. In addition, there are several other indicators closely related to your profitability. The return on capital directly tells you what level your profitability is at. Taking Company A as an example, their annual net profit was 1.27 million yuan, and invested capital was 6 million yuan, so their return on investment was about 21%. The national average for this indicator is about 20%, 25% is medium, and 30% or above is upper level (these data are related to the industry, brand, and category, not absolute standards). That means Company A's profitability is around the national average. Besides return on investment, there are two turnover indicators that represent your profit efficiency. Here we must remember one sentence: as dealers, what we do is the business of turnover. In limited resources, increasing your turnover rate means improving the efficiency of making money. This is also a key indicator of whether you can earn more. The national average for capital turnover is about 10 times, medium level 15 times, and upper level 20 times; the average inventory turnover is 15 times, with medium and upper levels at 20 and 25 times. (Capital turnover is related to the agency brand, sales channels, manufacturer delivery cycles, etc., not absolute values.) For Company A, their capital turnover is 50 million / 6 million = 8.3 times; inventory turnover, based on their average annual inventory value of 4 million yuan, is 50 million / 4 million = 12.5 times. It can be seen that both of Company A's indicators are below the national average. After understanding the data, Company A's boss also said that first, in terms of capital, about 4 million yuan could maintain business operations, but he invested 6 million, which is an important reason for the low capital turnover. The extra invested capital generates additional interest, thus affecting the company's profitability. Based on the current benchmark interest rate for ordinary commercial loans from the central bank, the interest on a 1 million yuan loan is as high as 43,500 yuan, and in most cases, the interest amount is higher. That is, with 6 million yuan invested in operations, Company A paid at least an additional 87,000 yuan in interest alone, directly affecting the company's profitability. Low inventory turnover is a common problem for many dealer bosses, mainly due to excessive damaged inventory and heavy manufacturer tasks. Including Hongye Hengda, previously due to inventory issues, the annual handling of near-expiry products required hundreds of thousands, which also severely impacted profitability. Therefore, under unchanged market sales and expense amounts, dealers who can improve return on investment and turnover rates can earn more. Most dealer bosses have significant room for improvement in turnover rates. There are many other data indicators such as net profit margin, expense ratio, cost per ton, etc., that dealers need to self-test. In the profitability testing process, the more detailed the checks, the better they reflect the problems and details in business operations. For example, in Company A's profit and expense analysis table, the boss broke down expenses into 14 sections, and he indeed found multiple problems, including increased delivery costs due to delivery efficiency issues, higher salesperson expenses due to employee management issues, and excessive taxes due to unprofessional finance. So, clarifying what data you need and which items to test is the foundation of dealer self-profitability testing. 2. Setting Goals and Standards Because the formulation of standards and the establishment of goals are often inseparable, we'll discuss goals and standards together here. First, goals should be reasonable and quantifiable. The most basic goal for a company is the sales target. Often, brand manufacturers give dealers a sales task, and many dealers take that as their goal, completing it to get support fees, etc. But a reasonable goal should be determined by both your own situation and the external environment. For example, the brand's task may not fit every dealer's situation; some dealers may easily complete it, while others face the risk of overstocking. A reasonable goal should have some challenge but not be unattainable, so that all levels of the enterprise can know the common goal, thereby enhancing cohesion and centripetal force, and making operating data more objective and effective. What is a goal? Literally, it's the scope within sight. What can be achieved is a goal; what cannot be achieved is a fantasy. So when setting goals, we must be realistic, not too illusory. For example, "I want to become China's richest person" is almost impossible to achieve. And how do you evaluate the achievement of your goal? This involves quantifying the goal. The profitability testing we discuss today is actually about quantifying goals through data. For example, "this year's sales performance must reach 50 million" can also be described with modifiers. For instance, "I want to be the number one in sales in the city," but that's not intuitive. Moreover, with quantified goals, you have references and comparisons, knowing where you are, how far from the goal, whether you've deviated, and whether you've progressed. So, knowing your position allows you to adjust at any time, how to exert effort, making success no longer out of reach. In Company A's case, although we can see the proportions of various data, some data are missing: the "goal" and "standard" data. Here, Company A set a goal of 50 million yuan in annual sales (a year-on-year growth rate of 15%). The outbound gross profit margin should not be less than 10%, and expenses should not exceed 7.5%. If these standards are met, net profit would be at least 1.25 million yuan, plus manufacturer support fees and rebates, making profitability quite considerable. Once goals are set, we can formulate standards. Based on the goals, break them down; the standard is the degree to which each item must be achieved to complete the goal. The finer, the better. Standards are for comparison; the data from self-profitability testing must be compared with standards to know whether the data is high or low. As seen in the actual expense analysis table, Company A failed to meet the set goals according to standards. Although sales and gross profit margin basically met the standards, expenses exceeded significantly. Although the goal was not achieved, through data analysis, they identified the problems, lacking in expense control and personnel management. If Company A could reasonably control expenses, reducing the expense ratio from 8.28% by one percentage point to 7.28%, the company's expenses would decrease by 50 million * 1% = 500,000 yuan, and net profit would increase from 1.27 million to 1.77 million yuan, a growth of nearly 40%. It is precisely because they had already set expense standards corresponding to their operating goals, combined with the comparison of self-test data, that the boss could clearly realize where the problems were and know how to change in future operations. Single data points show no value; all data only makes sense through comparison. The formulation of goals and standards is a matter of enterprise orientation and the foundation of team survival. Setting reasonable goals and standards allows everyone to think in sync and follow the same path. Without goals and standards, there is no action; without action, there are no good results; without results, there is no foundation for survival. 3. Regular Testing Finally, regular testing. Data is not static; many businesses have off-seasons and peak seasons, so regular testing is needed to correlate data over time. Returning to goal setting, if a goal has no time limit, it loses meaning, becoming a blank check, with the probability of completion remote, ultimately becoming empty talk. Regular testing makes the profitability testing tool more accurate; the more frequent the regular testing, the better it reflects changes in your company. Timely testing allows you to get feedback promptly to make corresponding judgments and decisions, which is extremely important for the long-term healthy development of the business. It's like a physical exam: one check showing no problems doesn't mean there won't be problems in the future. The business world changes rapidly, much faster than changes in the body, so it's even more necessary to conduct timely self-tests to understand your own situation, respond to internal and external changes, continuously optimize management in expenses, personnel, etc., and improve profitability. Therefore, it's necessary to formulate self-profitability testing plans annually, quarterly, and even monthly. Only then can you understand when to increase revenue and where to cut costs, maximizing profits. After clarifying testing items, setting goals and standards, and conducting regular profitability tests, completing these four key elements, we can use the obtained data for business diagnosis, identify problems in business operations, and make decisions. Solving these problems will naturally elevate your profitability to a new level. In summary, profitability testing is an effective tool to help dealers analyze and discover key difficulties in their business operations, and it is the foundation for solving operational problems. By grasping the above points, conducting reasonable and efficient self-profitability testing, and using this data well, I believe you can clearly identify the key difficulties in your business operations in the future. Only by understanding your own problems can you prescribe the right medicine, enhance your profitability, and earn more wealth.