Analyzing sales for better cash flow management

For a company’scash flow man-agement process

to work effectively toensure sufficient cashto continue its opera-tions, operating activi-ties must not only sat-isfy customers andproduce real cash prof-its, but must also con-serve and generatecash. Thus, operating personnelcannot leave cash responsibilitysolely to accountants. They mustbe aware of cash flow and itsimpact on company operations.It is these operational activitiesthat ultimately determine thecompany’s cash flow.

A company’s cash manage-ment study starts at the top ofthe organization. That is, topmanagement defines and com-municates its strategic plans forthe company, including areas ofexpansion, retrenchment, andstatus quo. At the same time,management members identifythe businesses they want to bein, the businesses they do notwant to be in, their basic busi-ness principles and belief sys-tems, and their desires for eachfunction within the organization.

For instance, top manage-ment may define a desire for thesales function, which has histori-cally sold whatever it could tocustomers, to become more inte-grated with the planning processand other functions such as man-ufacturing and engineering, aswell as making sales that gener-ate cash. In defining thesedesires, management may identi-fy attributes such as those shownin Exhibit 1.

The sales function is estab-lished to work as an integratedfunction that supports the busi-ness, not as an independent func-tion set up for its own existenceand survival. The sales functionsupports the business and notvice versa. In this manner, thesales function may be seen as thestarting point for positive cash

flow—that is, makingsales that maximize thecollection of cash andnet profits.

PURPOSE OF THESALES FUNCTION

The starting pointfor any business is todecide why it is inbusiness. We believe

that all businesses are in exis-tence to make money—in theright way—through quality cus-tomer service and expeditiouscash conversion. If a companydesires to stay in business for thelong term (i.e., to survive), itmust expand its long-term think-ing and recognize its customers(and non-customers) as an inte-gral part of its life cycle. It canno longer use its customers as adumping ground for excessinventory, a source of quickorders, a place for salespeople tovisit, and so on. Customerrequirements and the company’sability to please those customerskeep it in business. The salesfunction is the conduit betweenthe company and its customers.True customer service starts andends with the sales function.

Do you sometimes get the feeling that your salesfunction is in business for itself—instead of sup-porting the company? That means big problems formanaging cash flow, warn the authors of this arti-cle. What steps must you take to make sales anintegral part of cash flow planning? The authorsprovide a detailed how-to guide for you to use.

© 2003 Wiley Periodicals, Inc.

Rob Reider and Peter B. Heyler

Analyzing Sales for Better Cash FlowManagement

featu

reartic

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15© 2003 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.10213

Top management may defineits expectations for the salesfunction regarding customer ser-vices and making the right salesto the right customers as shownin Exhibit 2.

In many organizations, thesales function is treated differ-ently from other functions of thecompany. For instance, it mayhave a different compensation

program (salary plus commis-sions), various incentives (trips,cars, meals, vacations, exoticlocations for conferences), flexi-ble hours (both in and out of theoffice), more liberal expenseaccounts (customer meals, sport-ing events, company car), and soforth. In these circumstances, thesales employees may see them-selves in business for them-

selves. That is, their business isto generate sales, and the com-pany’s business is to provide thegoods or services and the othernecessary support including thecash to carry out their activities.

There may be limited coor-dination between the sales func-tion and the company, and oftenthe sales function and the com-pany end up working at cross-

16 The Journal of Corporate Accounting & Finance


Desired Steps for Sales to Generate Cash

• Sales forecasts more realistically related to actual customers and products to be sold.• A larger percentage of the sales forecast (at least 80 percent) matched by real customer orders.• Sales efforts driven by management’s identification in the planning process of what to sell, to whom, and at what

quantity.• A sales forecast with a high percentage of real customer orders that allows the company’s production to be

based on customer orders and expected delivery times, at a specified quality level.• A sales function that is geared more toward providing customer service than toward making sales that maximize

sales personnel’s compensation.• A sales activity that measures cash flow contribution to the company as well as booked profitability.• A sales function that works within the company’s plans together with the other functions of the company, such

as manufacturing, engineering, purchasing, accounting, and marketing.

Exhibit 1

Sales Function Expectations Customer Service and Cash Conversion

• Make sales to the right customers that can be collected profitably.• Develop realistic sales forecasts that result in a present or future real customer order.• Sell those products as determined by management to the right customers, at the right time, in the right

quantities.• Sell products that add cash flow to the company along with profits.• Correlate actual customer sales directly with management’s long- and short-term plans.• Ensure that sales efforts, and corresponding compensation systems, reinforce the goals of the company.• Integrate customer sales with other functions of the company, such as manufacturing, engineering, accounting,

purchasing, and so on.

Exhibit 2

purposes to each other. Theresults are unacceptable cus-tomer order backlogs, productsand services that cannot be pro-vided (and billed) on time,accounts receivable that are col-lected too slowly or not at all,inventory on hand that is notbeing sold, facilities and person-nel that are not being used effi-ciently and effectively, and inef-fective management. The salesfunction ends up being in busi-nesses it should not be in—andcustomer service, cash conver-sion, and making money suffer.

In effect, although sales (andpossibly net income) may be up,the company cannot pay its bills.The sales function must then bebrought back onto the same paththe company is taking (assumingthe company knows where it isgoing). The beginning point isalways, “What goods or serviceswe should provide, and to whom(i.e., what its markets shouldbe)?” The sales function shouldprovide significant input to thisprocess, as they are the oneswho most typically are dealingdirectly with the customers.

The purpose of the salesfunction is to service, not just tosell, the customer—that is, tokeep the customer in business sothat the company stays in busi-ness. The goal should be to pro-

vide the highest quality goodsand services to customers at thelowest possible price, while stillachieving an adequate return andcash flow for the company. Ifthis can be done successfully,both the company and its cus-tomers will grow and prosper. Ifthe sales function can alsobecome an integral and uniquepart of its customers’ businesses,it will enlarge its sales to thesecustomers as well as minimizethe effect of competitors. Thesales function, then, is the com-munication link between thecompany and its customer base.

The purpose of the salesfunction, therefore, is not just tomake sales (and increase thenumbers month after month), butto make the right sales to theright customers at the right time.To do this, the sales functionstaff must be more fully integrat-ed into the overall company plan-ning system. They need to knowthe direction the company wishesto follow and then direct theirsales efforts along the same path.

PRODUCT ANALYSIS

The starting point in thecompany’s planning process is thesales and market forecast (bothshort-term and long-term fore-casts). This is the definition of

what goods and services the com-pany desires to sell and to whom.However, because the effective-ness of the organizational plan isdependent on the accuracy ofsuch a market or sales forecast,many companies experience plan-ning problems before going anyfurther, a result of their havingsales forecasts that are more fic-tion than reality. So for mostcompanies the first step in effec-tive planning is to work towardmore accurate sales forecasts onwhich to base their plans. A goodrule of thumb is that an effectivesales forecast should consist of atleast 80 percent real customerorders. This means that the salesfunction may have to do whatthey may not have done in years—communicate with and servicethe customer.

The organization, togetherwith the sales function, mustdetermine what products or ser-vices (or product lines) it wishesto sell in the coming period. Thisdecision is made by analyzingpast sales, customer (and non-customer) needs and desires,inventory levels, production/ser-vice delivery capabilities, futur-istic considerations, competitivefactors, and so on.

An example of such a prod-uct analysis is shown in Exhibit3. Based on the analysis of these

November/December 2003 17


Product Determination

Prod SP Cost GP % Fore Sales Sales $ % Total GP%A $18 $15 $3 16.7 800 540 $9,720 2.2 $1,620 1 B $32 $20 $12 37.5 12,000 9,800 $313,600 70.2 $117,600 67C $56 $30 $26 46.4 3,600 2,200 $123,200 27.6 $57,200 32

16,400 12,540 $446,520 100.0 $176,420 100 SP = selling price; GP = gross profit.

Exhibit 3

three products (or product lines),the company has to determinewhat it wants to do with theseproducts in the future.

For instance, product A is alow-cost/low-selling-price itemwith low profit margins. Thecompany may question whetherit wants to stay in this businessfor competitive reasons—inother words, making a low-costalternative available for thosecustomers for whom price is astrong consideration, or gettingout of this part of the business. Itis not only not realizing an unac-ceptable level of return, but it isalso tying up resources (facilitiesand personnel, including sales,and cash) that could be usedmore effectively with other prod-ucts. It is likely that any cashflow generation is small.

Product B is the company’sbread and butter; it sells theseitems repetitively at a more thanacceptable profit level (37.5 per-cent), with a high probability offavorable cash flow. Product Bmight well be a cash cow, sincesales of these items account formore than 70 percent of its totalbusiness and 67 percent of itsgross profits. These are the items

the business is geared for and forwhich the sales function can eas-ily obtain customer commit-ments. This is the part of thecompany’s sales forecast thatmust be accurate. With modesteffort by sales personnel this canbe achieved, if only they talk tothe customers.

Product C is the high price,top-of-the-line model for thosecustomers who are willing to paymore for a luxurious look oradditional options—often a sta-tus, rather than price, considera-tion. Although the company sellsfewer items of product C thanproduct B, its profits (and usual-ly sales commissions) aregreater. Accordingly, there islikely a tendency for sales per-sonnel to spend more time sell-ing Cs than Bs, which may becounter to the company’s plansto sell more Bs. Typically, thecompany does not know whatthe real costs (and added costs)are for such top-of-the-lineitems, and what internal strifethis causes in producing anddelivering its standard B items.Sales needs to consider the com-pany’s plans for product C—increase this business, de-

emphasize the business, or main-tain it approximately where it isat present.

Whatever they decide, com-pany management must directthe sales function so that itsefforts are expended wheredesired. Cash flow generated (orlost) by each of the productsneeds to be an integral part oftheir decision making.

The company should be ana-lyzing their product items (orservices) and related productlines on a periodic basis to deter-mine such things as shown inExhibit 4.

There should be an expecta-tion that such product analysisexists. However, should very lit-tle or no such analysis exist, thiswould not only be a cash man-agement deficiency, but salesstatistics would also have to bedeveloped in order to evaluatesales function performance. Typ-ically, the 80/20 rule applies;that is, 80 percent (or more) ofthe company’s sales come from20 percent (or less) of its cus-tomers; and 80 percent of itsprofits come from 20 percent ofits products. These customersand products should be identi-fied and evaluated with regard totheir effect on sales, cash flow,and company operations.

Based on this analysis, thecompany might ask such ques-tions as shown in Exhibit 5.

SALES FORECASTS

The sales forecast is one ofthe primary inputs into the com-pany planning process. Not onlyis it necessary to know what wassold in the past and to whom andat what price, profit margin, andcash contribution, but also toknow what the company is goingto sell in the future. It is thisfuture sales forecast that thecompany will use to develop its



Product Analysis Considerations

• Relationship to sales forecast and company plans • Products/product lines doing better or worse than expected• Product contribution to profits • Customer sales statistics• Unforeseen occurrences: lost sales, unexpected sales, returns, inabili-

ty to deliver, large backlogs, and so on • Effects of competition• Necessary or requested product changes• Relationships to inventory levels

Exhibit 4

planned profit plan. Thisbecomes the sales budget onwhich it plans its productionbudget of goods and services(taking into account whatalready exists in inventory) andwith accurate and realistic costs,its profit plan and cash budget.The greater the number of realcustomer orders in the salesbudget, the more accurate theprofit plan will be. With inaccu-racies and guesstimates based ona prior year’s inaccurate salesforecasts in the current salesforecast, the company will pro-duce more for inventory than forcustomers, which will in turnresult in failure to meet its profitplan and an unfavorable cashposition. Sales forecast figurescompared to actual sales for

products A, B, and C are shownin Exhibit 6.

Analysis of this chart showsthat the sales forecast is way outof line for all three products, butis closest for Product B. Withsuch a forecast discrepancy, it is

difficult for the company to planeffectively. It is apparent that thecompany must have more realis-tic sales forecasts in order toplan their operations and expect-ed results. This usually meansthat the sales staff must get clos-



Product Analysis Questions

• On which customers and products does the sales force spend most of its time?• Is adequate consideration being given to whether the prime customers pay their bills on time?• Is sufficient emphasis being placed on selling those products that contribute adequately to company cash flow?• What is the sales emphasis, on the top 20 percent or on the other 80 percent? • Is the focus on existing top customers, other customers, or potential new customers? • Is there any emphasis on finding new uses for the top 20 percent of customers and products?• What is the extent of customer service for the top 20 percent, others, and new customers? • Are sales personnel aware of customer and product statistics, and do they actively alter their sales plans based

on such statistics? • Is sales emphasis on dollar sales resulting in sales commissions rather than on company goals and profitability? • Does sales staff communicate problems with products regardless of the products’ salability (high sellers as well

as low sellers)? • What is being done about the 80 percent or so of customers and products that produce only 20 percent of sales

and profits? Are there any sales efforts to increase sales of those products and to these customers? • Are there new products that need increased sales efforts or older products in decline that should be considered

for elimination or phasing out? • Does sales staff provide adequate customer service to all customers—top, middle, bottom, and potential? • Are opportunities, such as product enhancement, new products, changes in use, decline in demand, and so on

recognized?

Exhibit 5

Sales Forecast to Actual Sales

Product Forecast Sales Difference %A 800 540 260 32.5B 12,000 9,800 2,200 18.3C 3,600 2,200 1,400 38.8

Exhibit 6

er to their customers. The com-pany must be able to establishrealistic sales goals for eachproduct (or product line) in orderto direct the sales function andplan their internal operations.

In addition, although main-taining sales statistics by productand customer is important, thecompany must learn how to ana-lyze and interpret what thesenumbers really mean. Forinstance, it must identify thecustomers to whom it is sellingproducts A, B, and C, and deter-mine how these customers arepurchasing—that is, strictly byordering on their own, throughthe company’s sales direction,from its catalog, or othermeans. In effect, the com-pany must define the rela-tionship of past sales tofuture forecasts: Will theyincrease, stay about thesame, or decrease, and towhat extent? It is onlythrough the sales functionthat the company can determinethis needed information.

PRICING STRATEGIES

What to sell, how much, andto whom are important planningdecisions. Equally (if not more)important is the pricing strategyor decision—that is, what priceis to be asked for each item andwhat pricing flexibility can betolerated to still cover costs andcontribute to profits and cashflow. Effective pricing strategies,working in conjunction with thesales function, should enable acompany to meet its sales, cashflow, and profit plans. There arevarious methods or strategies fordeveloping a pricing structure,which include the following:

Percentage markup: usinga desired percentage of costs(e.g., 40 percent), usuallythought of as a gross profit

markup to calculate the sellingprice. For instance, an item witha calculated cost of $100, with a40 percent markup, would have aselling price of $140. Althoughthis method is a quick way tocalculate selling prices andmaintain consistent profit mar-gins, it has the built-in disadvan-tage of penalizing customers forthe company’s cost inefficien-cies. For example, if the cost ofthe same $100 item increased to$150, the new selling pricewould be $210 (a markup of$60—40 percent × $150). Thecustomer is now expected toreimburse the company for itscost inefficiencies and pay an

additional 40 percent markup onthese additional costs. In manycases, such pricing policies canput the company in a difficultcompetitive position, require thesales function to work harder foreach sale, and possibly result inlost customers.

Dollars per item: using aconsistent dollar markup peritem over costs. In the aboveexample, if the company desiresto earn $30 per item, the sellingprice at $100 cost would be$130; and at $150 cost, it wouldbe $180; and at $80 cost, a $110selling price. This process tendsto stabilize profit margins,rewards customers for the com-pany’s cost efficiencies (withoutpenalizing them extra for thecost inefficiencies), and clearlyidentifies the dollar amount ofgross profit per item. However,if costs increase legitimately, andthe markup is not adjusted, the

company’s profit margins andcash flow will deteriorate.

Market pricing: using themarketplace as the starting pointfor setting prices. For example,if the standard price for the com-pany’s goods or services is $200in the marketplace, this becomesits basis for pricing. Theoretical-ly, if a company lowers its pricesfrom the market price, its salesshould increase; raising pricesshould decrease sales. Thisapproach typically stresses salesand may tend to disregard settingselling prices to recover costsand contribute to profits andcash flow.

Competitive pricing: settingprices to beat competitors,regardless of whether theadditional business is prof-itable or desirable. Compa-nies sometimes get caughtup in the “beating the com-petition” game, losing sightof their real reasons forbeing in business. If a com-

pany finds itself in a competitiveselling position—either in totalor in part of its business—manytimes the best approach is toprovide the highest quality prod-uct at the least possible cost.This should allow the companyto stay competitive, serve its cus-tomers, make money, and gener-ate the cash required to continueto grow and prosper.

Unique niche: having aproduct or service that is uniqueor different from others beingoffered by your competitors—forexample, a unique process (auto-matic camera), unique features(higher speeds), specialized uses(fax and copier), and so on. If acompany can develop such aunique niche, it usually providesa marketing and sales advantage,particularly where there is a highcustomer demand. A companycan decide to maximize itsadvantages by setting higher



Effective pricing strategies, working inconjunction with the sales function,should enable a company to meet itssales, cash flow, and profit plans.

selling prices and possibly maxi-mizing its return in the shortterm. However, such a policy(with high profit margins andcash flow) usually results inother competitors entering thefield and possibly driving pricesbelow acceptable levels (or thecompany out of the business—e.g., the microcomputer busi-ness). A better approach may beto increase the barriers to entryby continually controlling costsand keeping prices as low aspossible and quality as high aspossible. This approach may notmaximize short-term profits, butit should maximize returns in thelonger term and tend to keepcompetitors from enteringthe field (e.g., Wal-Mart).

Quality strategy:establishing an image inthe marketplace for qualityof product and/or service(e.g., hotel chains, carrental agencies, auto mak-ers, appliances, etc.). Typi-cally, customers will be willingto pay more for such perceivedquality, and this can provide acompetitive advantage. However,it may cost the company consid-erably to establish and maintainthe quality image – and it mustcontinually deliver such quality.If quality suffers appreciably, thedownward sales cycle maydevelop faster than the originalupward sales flow.

Price sensitive strategy:competing based on being ableto sell at the lowest price (e.g.,Dollar Stores, Bic pens, Hyundaicars, etc.). Using this approachto set selling prices requires acompany to be closely in touchwith its costs, profit margins,cash flow, and break-even points.Should it have to raise prices(and customer service, or thelack thereof, remains at the samelow level), the resultant loss ofsales may grossly exceed the

safety level of the company’sexisting volumes.

There may be pricing strate-gies other than those describedthat a company wishes to use.The important factor to consideris that the pricing strategyshould fit into the company’sbusiness and sales plan andallow it the flexibility to ensuresuccess. Typically, this meansusing a combination of theaforementioned techniques,either in total or by individualproduct line or item. What ismost important is that the com-pany develops effective pricingstrategies that enable the salesfunction to service its customers

and maximize cash flow and theamount of profitable sales.

METHODS OF COMPENSATION

The sales staff tends to becompensated differently from therest of the company—typically,to some extent with commissionbased on sales made. This oftenplaces the sales staff emphasison selling those products thatmaximize their commissionsrather than on those productsand customers that maximize thecompany’s goals. Sales compen-sation policies must coordinatewith the agreed-upon directionof the company. Sales commis-sions must also relate to prof-itability and collectibility. Manycompanies have instituted com-mission payments based on prof-itability and delay commissionpayment until the cash has beenreceived. This creates a signifi-

cant impact on company cashflow, as it creates a strong incen-tive for sales staff to be sure thatinvoices are paid on a timelybasis, and sales are made to cus-tomers who are likely to pay. Ineffect, making the sales force anadditional collection functionimproves cash flow significantly.

The method of compensa-tion must also encourage theproper level of customer servicenecessary to increase sales fromexisting major and minor cus-tomers, potential new customers,and non-customers. In addition,the sales force must be availableto service the customer after thesale—and after the sales com-

mission has been earned.Many times, a salespersonwill do what has to bedone to make the sale andearn a commission butconsider other areas ofcustomer service nonpro-ductive. Many sales per-sonnel have burned out to

some extent and would ratherwait for the sales orders to comein and earn the easy commis-sions than do the full customerservice and sales job they werehired to do. The company mustprovide proper supervision,direction, and institute accounta-bility (and related reporting sys-tems) to ensure that the salesfunction is performing effective-ly in accordance with companydirection so that sales perfor-mance coordinates with thoseitems shown in Exhibit 7.

There are numerous methodsfor compensating sales personnelother than on a strict commis-sion basis. The company mustevaluate the method of salescompensation on the basis ofwhether it results in moving thecompany toward its goals ortends simply to enrich the salesstaff (often to the detriment ofthe company).



…making the sales force an addi-tional collection function improvescash flow significantly.

The method of compensa-tion must motivate the salesforce to effectively sell so that the company’s, the cus-tomers’, and the sales person-nel’s needs are all met. It mustsupport the coordination of allof these factors and encouragethe sales function to worktogether with the organizationand its plans.

Other compensation meth-ods include:

• Salary plus commission(over a specified level);

• Salary based on results(sales level plus customerservice);

• Customer calls or contacts;• Variable commission (based

on customers and/or prod-ucts sold);

• Collections (payment basedon sales collected);

• Profitability (payment basedon sales profit);

• Customer base or territory;• Group compensation based

on defined results;

• Salary plus profit sharing;and

• Salary only.

SALES INFORMATION ANDREPORTING SYSTEMS

The company must under-stand what the elements of adesirable sales information andreporting system should include.An effective sales informationsystem must provide for integra-tion with the operating compo-nents of the company such asmanufacturing and productioncontrol, engineering, accounting,inventory control, quality con-trol, shipping, credit and collec-tions, and so on. The informa-tion system must provide salespersonnel with the informationthey need to properly service thecustomer and work cooperativelywith the other operating areas ofthe company. In essence, a well-designed information systemallows the sales function to pro-vide an effective communica-

tions link between the customerand the company.

A desirable sales informa-tion and reporting system shouldinclude the elements shown inExhibit 8.

PERFORMING THE SALESFUNCTION ANALYSIS

A number of initial ques-tions must be answered prior tothe start of an analysis of thesales function and its effect oncash flow management. Theseinclude:

• Type of business: manufac-turing, service, distributor,wholesaler, retailer, etc.

• Type of process: make toorder, sell from inventory,direct sales, broker sales,etc.

• Type of sales: direct sales,OEM sales, engineeringsales, point of sales, good-will sales, etc.

• Type of sales organization:company, broker, distribu-



Factors To Consider: Coordinating Sales Performance To Company Direction

• Company plans: by customer and product line • Sales forecasts: with a high percentage of real customer orders (80 percent or higher)• Customer service requirements: before and after the sale• Cash conversion requirements: selling to customers with timely payment records • Other functions: for example, manufacturing, engineering, shipping, customer relations, accounting, product ser-

vice, and so on• Product profitability: selling the right product for the company, not to maximize commissions • Product cash flow: selling products that generate positive cash flow for the company on sales made• Customer satisfaction: selling what the customer needs• Sales timing: selling for the long term, not for short-term sales commissions or sales incentives.• Internal ability to produce, deliver on time, and service the customer: during and after the sale• Inventory levels: items to be sold from inventory, items to be made upon receipt of the order, items to be discouraged

Exhibit 7

tive, manufacturers’ repre-sentatives, combination, etc.

• Sales office locations: head-quarters, remote salesoffices, selling from home,individual offices, etc.

• Organizational hierarchy:sales manager, sales supervi-sors, number of sales person-nel and support people, etc.

• Information systems: salesforecasts, planning systems,sales and customer statistics,product line and item prof-itability, etc.

• Method of compensation:commission, salary andcommission, salary only,salary and bonuses, teamcompensation (based onsales made or cash collect-ed) etc.

• Systems and procedures:how the sales function oper-ates and how it is integratedwith the rest of the company

• Purpose of the sales func-tion: sell what they can, cus-tomer service orientation,

communication link betweencompany and customer,goodwill representation, etc.

In effect, it is incumbent onthe analysis team to find out asmuch as possible about the salesfunction to be analyzed. Ifappropriate, the analysis teamshould consider an analysis ofthe company’s planning proce-dures. This enables the analysisteam to gain a complete under-standing of the company’s salesfunction as well as determinethe most critical areas affectingcontributions to positive cashflow.

A list of sales function desir-able operating practices and effi-ciencies is shown in Exhibit 9.

SALES: AN INTEGRAL PART OFPLANNING

The sales function must beconsidered as an integral part ofthe company’s planning process.Top management must define

for the company the businessesit is in, its basic business princi-ples, and the products/servicesto be sold to which customers atwhat times. It is within thisoverall planning framework thatthe sales function develops itsplans (or sales forecast) to inte-grate with top management’sexpectations. Such sales plansmust incorporate the maximumlevel of real customer orders(e.g., 80 percent of total fore-cast), so that the company canexert its efforts on servicingthese customers and turning thesales orders into deliveries andcash collections in the shortesttime possible.

In addition, each customerand sales order must be lookedat as a profit and cash flow cen-ter. That is, the total salesamount must be profitable, butalso provide a contribution topositive cash flow. To accom-plish this, the company mustexercise adequate control overproduct, functional, and cus-



Desired Elements in a Sales Information System

• Realistic sales forecasts that integrate with organizational business and sales plans• Reporting of sales forecast versus actual sales by product line or item and by customer, with a mechanism for

revisions to the sales forecast• Sales statistics showing items ordered, sold, delivered, and collected• Customer statistics showing items ordered, comparison to prior sales, amount of sales, new items, and so on • Profitability analysis by product and by customer, indicating plus and minus variances• Cash flow analysis by product and by customer showing cash contribution by product and by customer• Sales staff statistics showing sales by individual, profitability by product and customer, customer sales and pro-

jections, orders in process, and so on • Relationship of sales to other company factors such as backlog, inventory levels, production availability, engi-

neering requirements, other customer requirements, and so forth • Product line analysis that relates sales to company goals and direction, cost-volume-profit (C-V-P) and break-

even analysis, expected profit goals, comparison and trend analysis, and so on

Exhibit 8

tomer costs. Not only does eachdollar of cost savings produce anadditional dollar to the bottomline, but it also allows companymanagement greater freedom inmaking pricing decisions. Whilethe emphasis in most companiesis on controlling product costs,functional costs (e.g., sales orderprocessing, accounts receivable,and collections) and customercosts (e.g., customer service,installation, and after sale sup-port) must also be considered inevaluating the efforts of the salesfunction.

Although in many situationssales prices may have to be setbased on outside influencessuch as market pressures, com-petition, and customer accep-tance, the company must strivefor the greatest flexibility inprice setting based on maximiz-ing the differential between realassigned costs to selling price.Accordingly, the sales functionmust be analyzed as an integrat-ed part of company operations.No longer can the sales functionoperate on its own (as if it werein business for itself) without

clear direction from top man-agement and integration withthe other operating areas of thecompany. It is within this con-text that the sales function mustbe analyzed as part of customerservice and cash conversion,and as an effective contributorto positive cash flow. It is nolonger acceptable to make salesthat cannot be produced, deliv-ered, and/or collected in a time-ly fashion, that is, sales thatmay produce a sales commis-sion but do not produce desiredcash flow.



Sales Function Desirable Operating Practices

• A sophisticated sales forecast system that correlates closely with actual customer orders• Sales forecast procedures that allow for integration with production scheduling techniques• Sales forecasts and plans that are directed toward selling the desired product lines and that allow for monitoring

actual versus planned results• Sales statistics and reporting systems that accurately detail what has happened so that remedial action can be

taken• Effective sales management that properly directs and controls the sales force• Sales compensation and commission policies that integrate with sales planning and assist in achieving the

desired results• Sales systems that accurately compute sales commissions and ensure that sales personnel are paid at the right time• Sales statistics by product line, individual product, and customer that enable sales management to make the

correct decisions and take appropriate actions• Sales management procedures that provide for direct supervision of sales staff, including proper training, orien-

tation, and review • Customer relations policies that are exemplified by direct customer orders, non-dependence on specific sales

personnel, product loyalty, and customer satisfaction• An ongoing customer base that consistently purchases an expected level of product and can be counted on• Information system that provides the ability to relate sales efforts and related costs to sales levels achieved• Maintenance of selling costs as an expected percentage of total sales• Selling and promotional techniques that can be directly related to the success of the sales effort• Customer information system that provides data relative to the sales effort, product quality, timeliness of deliver-

ies, product changes, desired services, after-sales service, and so on

Exhibit 9



Rob Reider, CPA, MBA, Ph.D., is the president of Reider Associates, a management and organizational con-sulting firm located in Santa Fe, New Mexico, founded by Dr. Reider in 1976. Rob is the course author anddiscussion leader for over 20 different workshops/seminars, and has presented over 1,000 such seminarsacross the country. Rob is also the author of Operational Review: Maximum Results at Efficient Costs (bookand workbook); Benchmarking Strategies: A Tool For Profit Improvement; Improving The Economy, Effi-ciency, and Effectiveness Of Not-For-Profits; and Managing Cash Flow: An Operational Focus (co-authorwith Peter B. Heyler). Rob is also the author of the recently released work of fiction Road To Oblivion: TheFootpath Back Home, a novel of discovery that looks at life after downsizing. Peter B. Heyler, CPA, MBA,has been affiliated with Reider Associates for over 20 years as both a consultant to the firm and seminarpartner, developing and presenting numerous professional seminars. He presently has his own consultingfirm in Missoula, Montana, which specializes in the areas of strategic, financial, and business developmentplanning for small and medium-sized clients in a variety of businesses. Peter is also the co-author, withRob Reider, of the book Managing Cash Flow: An Operational Focus. In nearly 15 years as an executive inprivate industry, Peter assumed a variety of financial management responsibilities, including vice presidentof finance and administration, treasurer, and chief financial officer for three manufacturing companies. Hehas served on the boards of several for-profit and not-for-profit organizations. This article is adapted fromthe authors’ book, Managing Cash Flow: An Operational Focus (John Wiley & Sons, Inc., 2003).

Documents

Analyzing sales for better cash flow management