Income Statement Provides Road Map to Higher Profits

I recently had a conversation with a vending operator who shared with me that all of his snack/pop routes were producing over $10,000 per week in sales. In fact, two were consistently producing more that $12,000 per week. Needless to say, I was impressed with his performance and began questioning him on how he was able to accomplish that feat. His simple response was, “I buy what sells.”

My natural instinct was to ask the question, “Won't that kill your rebate?” Being a former sales representative for a major vend product manufacturer and the chief financial officer of a regional vending operator, I knew that unless you align your purchases with the manufacturer's rebate programs, your rebate is reduced or eliminated.

The operator's response was that although he did not hit a rebate number, he virtually never “stales out” any product in his warehouse or machines. This includes fresh pastry!

The conversation made me rethink about how I look at a vending income statement. I asked myself, “Is it possible to drive the bottom line outside of reducing product cost through rebates?” The answer is, “Yes!”

This might be an obvious answer to some, but in recent years, many operators have become too focused on maximizing rebates. There are several reasons for this, the main one being that rebates are one of the simplest ways to increase profits.

Every veteran operator knows that running a vending business has become very challenging. With costs rising, operators naturally want to protect their profit margins. Passing price increases on to customers is tedious and the outcome is never certain. Finding new locations in today's market is equally difficult. And adding new services requires a lot of planning and upfront investment, and again, the outcome isn't guaranteed.

Cost of goods: a focus for many operators

As the CFO for a large regional company, I was no different than many other vending operators. I was constantly challenging our product procurement team to manage our costs of goods. It was not an easy task. There are many variables that go into producing cost of goods such as sales price, purchase price, stales, theft, miscounts on inventory, and rebates. It is a complex number that requires constant management.

We partially drove profitability by focusing our growth on particular manufacturers. Growth and the related rebates can enhance profitability, but it's tough to grow product lines by double digits year after year. The better payouts on rebate programs require you to do this.

In retrospect, some of these actions were short sighted.

The fundamental reason for making a financial business decision is to improve profitability. The answer must be, “Yes,” when the question is asked, “Will this change create more profit for my organization?”

The primary reason to drive revenue is make yourself more profitable and at bare minimum to keep pace with the constant increases of expenses.

When times are as challenging as they are today, the best approach is to review all aspects of the operation in search of maximizing profits.

The most important tool the operator has to understanding profitability is the income statement. The income statement summarizes sales, costs and profits.

Income statement: a useful tool

Based upon the NAMA 2007 Operating Ratio Report, the typical vending operator is actually producing a higher gross profit than the high profit operator. In fact, gross profit is actually 2.4 percent better for a typical operator than for a high profit operator.

Being a high profit operator is not the result of better cost of goods sold, but by reducing payroll and operating expenses as a percentage of sales.

The typical operator, according to NAMA, has a 49.6 percent combined payroll and other operating expenses. The high profit operator, by comparison, has a 43.7 percent combined payroll and other operating expense. That is almost a 6 percent differential. In an industry that produces a 2 percent to 3 percent bottom line, it is obvious what is driving profitability.