This post is coauthored with my good friend Nishit Ganatra who is currently the ASM of Punjab, J&K for CavinKare. He interned with me at L'Oreal and graduated from XIM, Bhubaneshwar. He enjoys troubling the Pakistani army by attempting to cross over the border from time to time and is giving their economists nightmares as he contemplates to sell Chik shampoo across the border owing to the kindness of his boss.You can find him here.
So probably the first thing that your distributor/dealer/stockist is going to tell you when you go to him for the first time is “Sirjee, ROI nahin baith raha hai”. What this simply means is that he is challenging you to calculate his return on investment.
So probably the first thing that your distributor/dealer/stockist is going to tell you when you go to him for the first time is “Sirjee, ROI nahin baith raha hai”. What this simply means is that he is challenging you to calculate his return on investment.
This is sort of a monthly exercise – he
knows that he is getting an ROI, else he would not be in the business. What he
simply needs is some ego massage so that he gets an ILLUSION that he is in
control of something when he is not – your rates are fixed, your schemes are
fixed, and so are your claims. While ROI is something that they teach us in
first day of BSchool, calculating dealer ROI might be a different ball game
altogether as he is a weasel who is going to try different permutations and
combinations to get the better of you. Do this properly with him, and he (and
you BDE/TSO who is twice your age but earns half as much) will respect you
forever.
The equation is simple – Return/Investment,
Return = (Earnings – Expenses).
The trick lies in realizing what earnings,
expenses and investment involve & it is here where the dealer uses his
tricks.
Let’s put down the formulae first:
a.
RoI or Return on Investment = Returns/ Net
Investment
b.
Returns = Earnings – Expenses
c.
Earnings = Gross Margin that the dealer enjoys
(Usually 6%  8% in FMCG companies)
d.
Expenses = Direct Expenses + Indirect Expenses
1.
Here is where the first trick lies, Calculating Expenses:
This arises from the fact that the dealer in question is not dealing with
just 1 company, he instead has 45 or even more number of companies that he is dealing with. Hence there are some resources
that he is exclusively using for a particular company for eg. Sales Man and
similarly many resources that he is sharing among the companies eg. His godown
space, accountant, supply units etc.
Please
note there is no thumb rule to it as there might be (and more often than not,
will be) cases where even salesmen are being shared among 2 or more companies,
and there will be one guy who would be the accountantcummanagercumsupply
wala etc. This is where the concept of direct and indirect expenses comes in.
Hence his expenses
are split in to 2 parts i.e. Direct & Indirect Expenses
Direct Expenses are those that the dealer incurs
exclusively for the company concerned.
And Indirect Expenses are those that the dealer incurs in totality for
the companies for whom the resource/s is/are being shared.
The only rule in calculating expenses is that you need to take into
account the part of expenses that he is incurring for your company alone. We
will see how we do it below.
2.
Similarly the second trick lies in properly calculating the denominator, i.e
Net Investment.
A dealer’s investment comprises of 3 parts : Average Stock that lies in
his godown, Average Market Credit that he extends & Average Claims
Outstanding,
Hence,
Investment = Avg Closing Stock + Avg Market Credit + Avg. Claims
Outstanding
Here the usual suspect where one may go wrong in calculating Investment is
the first variable i.e. Average Closing Stock of the dealer.
A layman would take the monthend closing stock as the
average closing stock for the dealer, or worse if you do the mistake of asking
the dealer what his closing stock is, the beast would tell you a figure which
will be his all time high closing stock in a month.
The typical trend in FMCG is that majority of Pushing, also known
colloquially as “thokna” (Primary) and Pulling (Secondary) happens in the last
week and therefore the last week is not a true indicator of the entire month’s
activity then why consider last week’s closing stock as his month’s closing
stock. (To clarify, primary is what your company bills to the dealer and secondary is what your dealer bills to the retailer)
Confused?, we will deal with it with simplicity. Consider this as the
trend of Primary & Secondary for a dealer in a 4week cycle of a month
WEEK

OPENING STOCK

PRIMARY

SECONDARY

CLOSING STOCK

1

5, 00,000

50,000

1,00,000

4,50,000

2

4,50,000

1,00,000

2,00,000

3,50,000

3

3,50,000

2,50,000

2,50,000

3,50,000

4

3,50,000

5,50,000

4,00,000

5,00,000

The above table is how a dealer’s inventory in a typical FMCG setup
would behave like, i.e. majority of activity happening in the last week and
hence one would be wrong in taking 5,00,000 (Week4 Closing Stock) as the
average closing stock for that dealer in that month.
The better way to do it is to take an average of all 4 weeks’ closing
stocks. In this case it would come out to be as : ( 4,50,000 + 3,50,000 +
3,50,000 + 5,00,000) / 4 which equals to 4,12,500 which is lesser than the
previous result and hence his investment
goes down and RoI goes up.
Enough of this gyaan now, let us get straight down to calculating a
sample ROI
Premise:
Mr. Atul Mittal is the proud owner of his distribution firm
M/S Bhagat Ram Jwala Prasad. His firm deals with distributing 4 companies in
total of which ABC Pvt. Ltd. Is one for which we need to calculate the RoI. The
firm has 1 dedicated (exclusive) salesmen working for ABC Pvt. LTd. with a
monthly salary of INR 6,000/ per month per salesman. Apart from this, the firm
also has an accountantcummanager with a monthly salary of INR 5,000/ per
month, pays a monthly rent for the godown which comes to INR 5,000/ per month,
incurs electricity & miscellaneous costs (supply units, chaipaani etc.) to
the tune of INR 5,000/ per month. Other expenses such as his son’s education
and his daughters marriage which your dealer would want to include are not to be
included.
All figures are
assumptions
Monthly Business (Turnover) inclusive of all 4 companies:
20,00,000/;
Monthly Business (Turnover) of ABC Pvt. Ltd. : 8,00,000/
ABC Pvt. Ltd.’s Company Margin: 8%
Average Market Credit for ABC Pvt Ltd. Is 10,000/ INR
Average Closing Stock for ABC Pvt. Ltd is worth 2,50,000/
INR
Average Claims Outstanding in ABC Pvt. Ltd. Is worth 10,000/
INR.
Hence going by the formula:
RoI
or Return on Investment = Returns/ Net Investment
Returns = Earnings – Expenses
Earnings = Gross Margin that the dealer enjoys (Usually 6%  8% in FMCG
companies)
Expenses = Direct
Expenses + Indirect Expenses
Let’s calculate each element one by one:
Earnings = Gross Margin = 8% of monthly turnover of ABC Pvt.
Ltd. which is = 64,000/
Expenses = Direct Expenses + Indirect Expenses
Direct Expenses = Salary of Exclusive Salesmen = 1*6000 = 6000
per month
Indirect Expenses for
ABC Pvt. Ltd.=( Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover) *
Total Indirect Expenses
Total Indirect Expenses = Godown Rent + Manager’s Salary +
Miscellaneous Expenses = 5,000 + 5,000 + 5,000 = 15,000/
Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover =
8,00,000/20,00,000=40%
Hence, Indirect Expenses for ABC Pvt. Ltd. = 40% of 15,000/
= 6,000/
Therefore Total Expenses = 6,000 + 6,000 = 12,000
Hence Returns = Earnings – Expenses = 64,000 – 12,000 = 52,000
Net Investment = Avg. Closing Stock + Avg. Market Credit +
Avg. Claims Outstanding = 2,50,000 + 10,000 + 10,000 = 2,70,000
Therefore RoI = Returns/Net Investment = 52,000/2,70,000 = .1925 or 19.25%
Just a point here....when you look at his investment in stock  one should always check whether he has taken bank loan. if he has then his actual capital investment is actually only to the extent of his own money. rest is interest which is part of expenses. a lot of dsitributors conveniently miss out this part of the equation. and for big distributors this makes a big difference in ROI.
ReplyDeleteSimilarly, if the distributor has a good overdraft facility then he actually pays for the stocks to the company from that and not his actual investment. here again interest should be added into his expenses and the investment reduced by the overdraft amount.
That's a very important point...
DeleteAnu that's very rightly pointed for bank finance. But do you mean should we not take bank funding as investment.? Pl share as formula as sited above
DeleteNormally your Distributor shouldn't have more then 30% of his finances driven from an overdraft facility. In case of an overdraft, reduce the overdraft amount from the Investment and place the interest in the expense.
DeleteThanks Anupriya! Duly noted :)
ReplyDeleteAlternatively, if a distributor rotates his investment say, 10 times a year, multiply that by net profit percentage per rotation.
ReplyDeleteFor eg:
The company gives a margin of 5% on its products to a distributor. After all his distribution expenses, the net profit % is 2.1, and his investment is 20L with an annual turnover of 200L, ROI is easily calculated as under.
No:of rotations = annual turnover/investment = 200/20 = 10 rotations/year
Investment = 20 Lakhs
This means he rotates his investment of 20lakhs, 10 times a year, each time making say 2.1%. So his ROI is 10*2.1 = 21%
Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also!
ReplyDeleteVery Well Explained.!Thanks
ReplyDeleteVery helpful. A much needed initiative. Thanks Kaushik! :)
ReplyDeleteBrilliantly explained  Subbu and Nishit! I remember looking for somebody or something to teach me this, about a year back. That my dist. ridiculed me abt not knowing my ROI calculation was the 'push comes to shove' part.
ReplyDeleteHowever, lets not forget a very important parameter of credit given by the company to the distributor which can range from 0 to anything.
So if Credit = 7 days, 7 days of closing stock is deducted from the distributor's investment. Also a distributor gives a cash discount to wholesale or even retail, so that too has to be accounted for. I would urge you to simplify this and put it up as ur article is crisp and clear and this could prove useful too.
Recommendation:
1) Teach them how to calculate a Super Stockist ROI as well. Far simpler than direct.
2) Also, in your next article you could explain how to get back an uninterested distributor on track based on key parameters. (Kaushik you had aced that, Nishit you could share too... btw sup with you?)
3)All distributors are swines with hair coming out of all their holes.. jusayin....they might not squeal but they do grunt a lot. Somebody has got to tell these kids that... Nishit you could elaborate I guess (this inference from ur fb statuses)
And excellent explanation Kiran... was thinking abt that while reading the article.
Cheers,
TiTo
hey TiTo,
ReplyDeletehw u doing man....
points noted dude....the upcoming posts will only highlight the point number 3 that u ve mentioned.
may be we could come up with a post about how to tinker RoI to get back distributor's interest provided he is sitting on a lesser RoI...
would urge you also to contribute...and about explaining credit, wholesale discount, we intentionally didn't go into the detail to avoid it from getting complicated...
nevertheless thanks for the feedback.
Cheers
nishit
Sure would love to contribute... but I would rather start by trying and provide some comic relief between intense FMCG sessions :P
ReplyDeleteThanks All of you.
ReplyDeletere,
amber verma
Realy good explained ....Thanxxxx
ReplyDeletethanks dear
ReplyDeletevery helpful.....thanks....for explanation of ROI insuch a way....
ReplyDeletethanks.............
Can anybody exactly explain following
ReplyDeleteper month
Sales: 10 Lac
Margin: 3%
Inventory: 2.5 lac
Market credit: 2.5 lac
Case 1: No credit from company to distributor
Case 2: 7 days credit from company to distributor
Case 3: 30 days credit from company to distributor
Pls explain the concept also
Thnx
GOOD explanation......... but one doubt is there in example. ROI is 19.25%, as per calculation this is monthly ROI but monthly ROI would be 1.52.5%
ReplyDeletesame doubt I have also. Could you plz explain it why.
Delete52k profit out of 2.7L investment is only fictionally possible
Deleteavik das......
ReplyDeleteif no expenses are there then
case 1: roi is 6%
case 2: roi is 7.2%
case 3: roi can't calculate....... because there are no investment.
please show the working for case 2 please...
Deletehi Ankit could you please explain the second case..
ReplyDeleteDavid
davidraja....
ReplyDeleteif market credit is given for 7 days.. then average market credit would be 75% of inventory, thus total invenstment wud turn out to be 4.2lac.. hence ROI wud turn out to be 7.1% (guys plz correct if im wrong .. not from fmcg background)
This comment has been removed by the author.
ReplyDeleteaa you are very close to being right if market credit = 2.5 lac
ReplyDeletefor 7 days market credit = 75% of inventory
= 75/100*2,50000 = 1,87500
total investment would be = 2,50000+1,87500 =4,37500
margin is 3% of sale of 10,0000 = 30000
so, Return on investment is = returns/total investment
ie : 30000/437500 which comes out to be 6.8 % or you can say 7%
but how come you came to conclusion that average market credit for 7 days = 75% of inventory cost ???
I believe, he has not taken it as 75%..but..for 30 days..stock is 2.5 lacks..so for 7 days it's 2.5 lacs* 7/30~=58300....So net investment in inventory=2,5000058300=191700.....So,
Deleteroi comes to be 6.7%..I think so...
Hi what is the healthy ROI for FMCG Distributors(as u told margin is between 6%8%)? Is it between 14%24%?
Delete30 days inventory is 2.5 Lakhs
Deleteso we can calculate inventory for 23 days which comes out to be (250,000/30)*23=191,667
then final investment= 191,667+250,000= 441,667
ROI= Earning/Net Investment
=(30000/441,667)*100
=6.7%
HI can any one confirm the standard norms for the ROI & Investment.
ReplyDeleteIf some one having please share @ vikasmendi@gmail.com
can anyone clear my following doubt
ReplyDeleteInvestment include Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding OK.... but what about deposit given for taking godown on rent and down payment done for purchasing vehicle do these investments are consider for calculation of net investment and if not then what would be consideration for them
thanks dear
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteHi..Can someone help me crack this..
ReplyDeleteDistributor does a 20Lac business per month. Earns Gross Margin of 10%, Exp per months comes to around 2%. Avg Inventory: One month, Avg Market Outstanding of 45 days. No claims outstanding. No company outstanding. Funding purely from internal resources. Doesn't have any other co's distributorship.
I get two different ROIs with different approaches. Turnover/Inv method and Standard Method of Net Earnings/Investment.
In both case it will be 38.4 % annual Roi
ReplyDelete1st method 160000 *100/ 500000 = 3.2 monthly Roi or 38.4 annual Roi
2nd method 2400000/5000000 = 4.8 rotations , Earning per rotation 8 % hence annual Roi will be (8*4.8) = 38.4% only
Can you explain how did you get 5000000 in the 2nd method?
Deletein first case read denominator as 50 lac and not 5 lac
ReplyDeleteBy Turnover/Investment method
DeleteTurnover is 20 lacs
and investment is (30/365)*100 i.e 8.219% and (45/365)*100 i.e 12.328% Total is 20.54% means investment is 20lacs*20.54%= Rs 410800
2000000/410800= 4.868 times Rolling
NP is 8%means ROI is 8*4.868= 38.94%
I second method NP is 160000
Investment is 410800
160000/410800*100= ROI is 38.94%
in the second case shouldn't the numerator be the annual turnover ?
ReplyDeleteCan anybody explain the following
ReplyDeleteAbc is a fmcg company
xxx is the product name
Margin of the product for stockist is 10%
Margin of the product for retailer is 20%
Mrp of the product is 25000
cost of stockist is 19120
Retail cost is 20830
What is the method of calculating the margin
Suppose ur MRP is 25,percentage of retailers margin is 20 %,distributor is 10 % then margin for retailers is 25 /1.2, it will be 20.83 which can be divided by 1.1 (10% distribution margin) .
DeleteANYONE KNOW THE Healthy ROI for the FMCG channel partner??
ReplyDeleteHealthy roi is 25%
DeleteHealthy roi is 25%
DeleteIn the comments above, Himanshu spoke about two methods of calculating ROI. One is the Inventory/Turnover and the other Net Earnings/Investment. Could you please elaborate a little bit more on the Inventory/Turnover method.
ReplyDeleteThanks for sharing this Informative content. Well explained. Got to learn new things from your Blog on SAP SD
ReplyDeleteDear friends...
ReplyDeleteI have a question...
Suppose im about to finalize a distributor for my company. Monthly proposed turnover is 5 lacs. What should be his minimum initial investment??how is it calculated?
a distributor take loan of rs 10 lac and he is paying rs 10000/ interest per month to bank can we take this in his investment for calculting his ROI??
ReplyDeleteInteresting Indeed ! I find this useful for Industrial Distribution too, not just FMCG.
ReplyDeleteHi, please tell someone how to calculate Avg. Market Credit and Avg. Claims Outstanding, explain with example.
ReplyDelete