A LOGICAL PROFIT-SHARING PLAN
I had pledged myself to a profit-sharing plan with my small staff for
the year beginning June 1, since my fiscal year would end with the last
day of May.
Think of it! By the end of May I would have finished my first year in
business. When I looked back at the year's experiences, I realized that
I surely had learned a lot in that short time. I had learned more each
month than I had learned in all the time I was a clerk. The reason was,
I suppose, because I _had_ to learn, whereas, while a clerk, I had had
neither the inclination to learn nor the encouragement. I think bosses
make a mistake in not encouraging their people to study the business.
Now, I want to tell about my profit-sharing plan. For almost two weeks I
had been spending nearly every night with Jock McTavish, the accountant
who had helped me out so much in the past. I had told him what I wanted,
and we had worked out a plan between us. Jock was Scotch and
old-fashioned. I sometimes called him glue fingers, because whenever he
got his hand on money it stuck to him.
"Aw, weel, noo," said Jock, "dinna fash yersel', mon! Ye may talk aboot
yer pheelantropy an' yer wantin' ta help yer fella creeters, but you
maun ken that you canna be doin' it unless ye fir-rst get the baubees.
When ye took o'er tha beesiness, ye planned tae sell thirty thousand
dollars worth o' goods the fir-rst year, and on that sales quota ye
planned expenses to be twenty per cent."
I nodded agreement.
"By tha end o' November," he continued, "or, in other wor-rds, at the
end o' the half year, ye were $1,128.00 behind your quota."
"Yes," I said, "but we have caught that up."
"Ye've done gr-rand," said Jock. "Noo frae June o' last year to the end
o' February ye hae doone $22,640.00, or $140.00 above your quota. This
means that tha third quarter o' your fiscal year showed an excess over
its quota o' $1,268.00, which, if ye had keppit oop tha same pace
through aw' tha year, would have meant an excess above your quota o'
$5,072.00."
"Wait a minute, Jock," I interrupted, "you're making my head go round
with all those figures." And I took out my pencil and worked the
figures.
"Sither," continued Jock, "ye planned your expenses to be twenty per
cent. on a $30,000.00 business, but, as a matter o' fact, it's costing
ye twenty-two and one-half per cent. on that basis."
"Let me see," I said, figuring vigorously, "Twenty per cent. of
$30,000.00--that's $6,000.00."
"That is so!" said Jock.
"But you figure that, at the present rate, expenses will approximate
twenty-two and one-half per cent. of $30,000.00--or $6,750.00."
"Ye spoke tha truth," said Jock. "In other words, ye're losing $750.00
worth of profit which ye would a' had if ye'd conducted your beesiness
better."
"I guess I've--"
"Tut, tut, mon," said Jock. "I'm no' saying ye haven't done grand. Ye've
done splendidly, but ye should be able tae keppit your expenses doon tae
twenty per cent. As a matter o' fact, when ye do more business I think
ye'll be able to do so."
"Where has that two and one-half per cent. extra expense gone to?" I
asked.
"I'll tell ye," said Jock. "Ye planned bad debts tae be one-half o' one
per cent., or $150.00, whereas they are aboot one per cent. or $300.00."
"Yes," I remarked ruefully, "I remember that we made a lot of bad debts
when we first took over the business; but, since I have put in that new
system of keeping closer track of charge accounts, we have had very
little loss that way. We will be down to our one-half of one per cent.
next year," I added cheerfully.
"Maybe ye will," said Jock, "and then again, maybe ye won't. Ye will, if
ye can keep your feet on the ground, and that seems deeficult for ye to
do all the time, does'na it?
"Wi' regar-rd tae advertising," he continued, "we planned it should be
aboot one per cent., or $300.00. Noo, as a matter o' fact, ye hae
already spent that, and will probably spend $100.00 more afore your
fiscal year is oop. Your advertising will be one and one-half per cent.
instead of one per cent. There's anither one-half of one per cent.
gone."
"Next year my advertising will again be one and one-half per cent.," I
said, firmly.
"All richt," said Jock, "but dinna forget that the extra one-half of one
per cent. means $150.00 cold cash."
"I'm quite willing to pay it," I said, and here I felt on sure ground,
for I was convinced that the advertising we had done had been
responsible in no small degree for our success in doing as much business
as we had.
"General expenses," continued Jock, ignoring my comment. "General
expenses we planned should be one and one-half per cent., or $450.00,
but they'll be two per cent., or $600.00.
"Your rent should hae been three per cent., or $900.00. As a matter o'
fact, it's $1,000.00. Depreciation was planned for one-half of one per
cent., but it'll exceed that, or so I surmise from what ye tell me, so
that ye might say that depreciation and rent accounts for anither
one-half of one per cent. excess o' your expense allowance."
"We will keep depreciation down to one-half of one per cent. nicely next
year," I commented. "I will avoid some mistakes in buying that I made
this year, and, besides, I will have cleaned out the remnants of the old
stock which I bought from Jimmy Simpson."
"On the ither hand," continued Jock, ignoring altogether what I said,
"ye expected delivery costs tae be one-half of one per cent., or
$150.00, whereas I dinna believe they'll exceed $100.00, so there is a
wee bit saving. Salaries should hae been eleven per cent., or $3,300.00,
whereas they're rather more than eleven and one-half per cent., or
$3,450.00. That is where your two and one-half per cent. has departed.
I'll summarize those excess expenses:
Bad debts..........................................½ per cent.
Advertising........................................½ per cent.
General expenses ..................................½ per cent.
Depreciation and rent..............................½ per cent.
Salaries...........................................½ per cent.
"Here's the poseetion," continued Jock. "The average mark-oop is
thirty-three and one-third per cent. on stock, or twenty-five per cent.
profit on sales price. Expenses were planned tae be twenty per cent. of
sales, and, had that been so, ye would hae had five per cent. profit
after all expenses had been paid, for yourself."
I began to listen attentively. Isn't it strange how one sits up and
takes notice when one's own pocketbook is in discussion?
"As it is," said Jock, "expenses being twenty-two and one-half per
cent., ye make only two and one-half per cent. profit, if ye do the
amount o' business ye expect."
"_If_," I said scornfully. "It's a cinch we'll do it."
"I hope ye will that, but dinna brag aboot it 'til ye get it. Ye canna
build your hoose 'til ye've got the bricks.
"Listen, noo," he continued. Jock had begun to remind me of an
inexorable fate, he went along so quietly, impartially, just as if he
were passing sentence on me. As a matter of fact, he was making me think
of the finances of my business in a way that I had never thought of them
before.
"If ye'd made five per cent. net profit on your $30,000.00 worth of
business, ye would hae added $1,500.00 a year to your income, whereas,
noo that ye may make only two and one-half per cent. on that amount,
your income will be reduced to $750.00. It's just those wee bit half per
cents. that hae taken $750.00 out o' your pooch."
"If we increase our sales," I said, "of course that is equal to
increasing our rate of turn-over, isn't it?" Jock nodded. "Now, see if
this is right: If we do make a little less profit on each turn-over, the
actual dollars and cents profit at the end of the year may be greater
than it would be if we made a larger net profit on each sale but didn't
sell so much goods."
"Ye reason that out well, lad," said Jock, and somehow I felt quite
chesty to think I had done something which pleased the old heathen.
"If ye keep your expenses as at present, and increase your sales, all
the profit on the excess business above your quota is porridge. Ye dinna
hae to pay any additional amount for rent, taxes, heat, light,
depreciation, advertising, or insurance. In other wor-rds, your
operating expenses on all business, over and above your sales quota, are
reduced by these items. This saving would reduce your operating expenses
eight per cent., meaning that this excess business over your quota would
only cost ye twelve per cent. to secure, instead o' twenty per cent. As
a matter o' fact, if ye can get more business than your quota calls for,
wi'oot increasing your salaries, that would eleeminate all expenses
except delivery and general expenses. Noo, if ye feel ye must give awaw
your har-rd-earned money here's a proposition for ye:
"Plan tae keep your salary expense at its present figure, which is based
on $30,000.00 worth of sales annually.
"Ye can afford to pay eleven cents for salaries oot o' every dollar ye
get. Give eleven cents on every dollar ye take, above $30,000.00, to
your salespeople, as a bonus and divide it among them according to their
salaries. For example, suppose next year ye do $40,000.00 worth of
business--and ye ought tae be able tae do this, because ye're selling
at a slightly better rate than $35,000.00 a year noo. If ye do, ye
secure $10,000.00 above your sales quota. Eleven per cent. of $10,000.00
is $1,110.00, which ye could deestribute among your folk."
I referred to my note book of expenses, and said: "Our salaries at
present total $71.00 a week."
"Including yoursel'?"
"Yes," I answered.
"Weel," continued Jock, "that bonus would add $22.00 weekly to that
$71.00. That means for every ten dollars o' salary now earned there
would be added $3.14 bonus."
"How would it work out in Larsen's case?" I asked. "He gets $20.00 a
week."
"His bonus would bring his salary to aboot $26.00 a week. Another way o'
putting it is that every dollar o' weekly salary seecures a bonus o'
$16.12 a year. I would suggest ye pay a bonus every quarter--if your
quarter's quota o' sales is seecured."
"Suppose we need extra help?" I said.
"If ye hae tae have extra help, the expense o' it'll hae to come oot o'
the $1,100.00 bonus, or whatsoever the amount might be. Unless ye did
this, ye'd be exceeding your original allowance for wages. If your
people know that, the less people there are wor-rkin', the more money
each o' them makes, they'll all o' them work as har-rd as they can to
accomplish the results wi'oot adding extra people tae tha payroll. There
is one ither thing I must warn ye of, and that is, tell all your people
that this is only a plan tae be tried for a year, and that each year
ye'll decide upon the sales quota according tae the growth o' the
beesiness.
"I think I follow you," I said thoughtfully. "The more business we do
with less help, and therefore less payroll, the bigger will be the bonus
to divide. But where do I come out in all this?" I asked. "Eleven
hundred dollars seems a lot to give to those fellows."
"Here's where you benefit," said Jock. "Ye give yourself a salary at
present of $25.00 a week, don't you? That's $1,300.00 a year. Now, then,
if ye sell $40,000.00 worth of goods next year, ye will make a net
profit of five per cent. on $40,000.00, which is $2,000."
"That's so," I commented.
"In addition to that," he continued, "ye make an extra eight per cent.
on $10,000.00, the excess sales over quota, on which ye hae no expense
ither than salaries; eight per cent. of that $10,000.00 is $800.00.
Then, again, remember that ye share in the bonus, for eleven per cent.
for salaries includes your ain, so ye receive a bonus of $403.00 oot o'
that $1,100.00. In other wor-rds, if ye hae $40,000.00 worth o'
beesiness the next fiscal year, and keep your expenses doon tae twenty
per cent. on a sales quota o' $30,000.00, your income would be
$4,503.00."
"Can you beat it!" I said, under my breath. "Four thousand five hundred
and three dollars," I continued slowly, "Ninety dollars a week. Great
Scott, that's making money!"
"It's aw' a question o' being able to get your people to speed up your
sales to increase the turn-over o' your capital so as tae make extra
profit wi-oot extra salespeople," said Jock.
"That's salesmanship," I commented, for I remembered that my friend
Robert Sirle--if I could call such a big man my friend--had said that
"salesmanship is the creation of additional business without additional
cost." "What we must exercise this next year is salesmanship. Why, I can
afford to make small increases in salaries and still make a good thing
for myself," I added.
"Aye," said Jock, "o' course ye can make increases in salaries, but
recollect ye can only give people the money in one way or the ither. If
ye increase salaries ye must reduce bonuses in proportion."
I decided to try the plan, and at our next Monday evening meeting I
announced it to the fellows. Jock was there, fortunately, to explain it
all to them, and finally they all understood it. Larsen, however, said
dubiously, "It's complicated to me, Boss."
"All ye've got tae think aboot," said Jock, in answer to him, "is that
ye get no bonus until the store has sold $30,000.00 worth o' goods.
After that eleven cents on every dollar is divided amongst ye according
to your salaries."
"When you start it, Boss?" then asked Larsen.
"We will start this on June 1," I said. I noticed Larsen's face fell, as
also did Jones'. "But," I continued, and here they brightened up, "if we
do exceed our $30,000.00 this year, I shall give a bonus, though only
half of what it will be next year."
"Why only half?" asked Larsen.
"Because," said I, "our expenses have been $750.00 too high as it is. If
we do exceed our $30,000.00 for the year ending May 31, we will split up
six cents on every dollar over that amount, in proportion to your
salaries. How does that strike you?" I said, for every one was silent.
Larsen rose to his feet, coughed impressively, and said: "Mr. Black, on
behalf of us fellows I say we appreciate it. I don't quite follow this
per cent. stuff. You are bigger business man than we,"--I could not help
looking at Charlie Martin, when he said this, for Charlie, with his
thorough business training in the college of business administration, I
knew to be a better business man, on the theory of business, at any
rate, than all the rest of us--"and, if you say so, we know it's O. K.
It looks good to me. I know the wife will be tickled to pieces."
I smiled at the way Larsen drifted from general congratulations to
thoughts of his wife.
Well, the meeting broke up pleasantly, and every one left with a firm
determination to do his best to increase sales without the need of
increasing our force. Jones and Larsen and the boy Jimmie walked down
the road together, and I heard Jones say: "We will work day and night.
If we can only do the business without getting any more help--"