Roi

1. Calculating Dealer ROI

This post is co-authored 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.

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 B-School, 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 4-5 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 accountant-cum-manager-cum-supply
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

2. 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 month-end 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 4-week 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 set-up would behave
like, i.e. majority of activity happening in the last week and hence one would be
wrong in taking 5,00,000 (Week-4 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

3. 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 accountant-cum-manager 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, chai-paani 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

4. 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%


ROI means Return on investment

ROI = Profit/Investment*100

Profit= Income-expense

For exammple

Distributor M/s Virgo agency in dwarka having turnover 70 lac per month
distributor margin 8%, Salesman 10000 rs, Accountant 10000 rs, Driver
10000rs, Helper 5000
Fuel 5000,Electricity 5000, Market credit 50000,Average closking stock 6.5
lac.

Ans. Income 70 lac* 5% = 350000
Expense Salesman salary= 10000
Accontant salary=10000
Helper salary=5000
Fuel =5000
Electricity= 5000
Total= 35000
Profit= 350000-35000=315000
Investment= 6.5 Lac+ 50000rs = 7Lac
ROI= 315000/700000*100 = 45%

Simple example want more contact me
Healthier ROI is around 22%

ROI is the returns you get out of your investments.

Lets say you buy something for Rs. 10000/- and sell it for Rs. 10200/- after a month then the
profit you made in one month is Rs. 200/-

So return on investment = 24%

Let me explain how:

Returns per month = Rs. 200

Formula for ROI = (Profit * 100) / (Investment * no. of years)

==> ROI = 20000 / (10000 * 0.083)

1 Month in terms of years = 0.083 (1/12)

5. therefore ROI = 24%

This ROI is the gross ROI.

Lets say you have to pay electricity bill and rent of Rs. 100 for that month then your net ROI
is 12%

This 12% is your realized return on investment whereas 24% is your total return on
investment