9/18/13 FMCG Gyaan and then some: Calculating Dealer ROI

gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html 1/6

FMCG Gyaan and then some

T h u r s d a y , J u n e 1 4 , 2 0 1 2

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

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.

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9/18/13 FMCG Gyaan and then some: Calculating Dealer ROI

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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 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

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9/18/13 FMCG Gyaan and then some: Calculating Dealer ROI

gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html 3/6

Posted by Kaushik at 7:47 PM

Labels: Basics, fmcg, ROI, Sales

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%

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Replies

Reply

24 comments:

Anupriya June 14, 2012 at 8:50 PM

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.

Similarly, 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.

Reply

prashant April 25, 2013 at 6:59 AM

That's a very important point...

Kaushik June 14, 2012 at 8:53 PM

Thanks Anupriya! Duly noted :)

Reply

Kiran June 14, 2012 at 11:19 PM

Alternatively, if a distributor rotates his investment say, 10 times a year, multiply that by

net profit percentage per rotation.

For 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%

Reply

Kaushik June 14, 2012 at 11:33 PM

Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also!

Reply

9/18/13 FMCG Gyaan and then some: Calculating Dealer ROI

gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html 4/6

Sambhav Jain June 14, 2012 at 11:48 PM

Very Well Explained.!Thanks

Reply

Ashish Shah June 15, 2012 at 12:05 AM

Very helpful. A much needed initiative. Thanks Kaushik! :)

Reply

Tirthadeep Dhar June 15, 2012 at 7:02 AM

Brilliantly 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.

However, 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

Reply

Capt.Krunch June 15, 2012 at 8:52 AM

hey TiTo,

hw 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

Reply

Tirthadeep Dhar June 15, 2012 at 10:47 AM

Sure would love to contribute... but I would rather start by trying and provide some

comic relief between intense FMCG sessions :P

Reply

Amber Verma September 26, 2012 at 7:15 PM

Thanks All of you.

re,

amber verma

Reply

Kapil Gupta February 8, 2013 at 4:26 AM

9/18/13 FMCG Gyaan and then some: Calculating Dealer ROI

gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html 5/6

Replies

Reply

Realy good explained ....Thanxxxx

Reply

Robin Godara Bishnoi February 21, 2013 at 9:46 AM

thanks dear

Reply

vibhor srivastav March 4, 2013 at 12:06 AM

very helpful.....thanks....for explanation of ROI insuch a way....

thanks.............

Reply

avik das March 20, 2013 at 10:51 AM

Can anybody exactly explain following-

per 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

Reply

Ankit Dwivedi April 12, 2013 at 6:14 AM

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 1.5-2.5%

Reply

rajesh srivastava June 20, 2013 at 3:43 AM

same doubt I have also. Could you plz explain it why.

Ankit Dwivedi April 12, 2013 at 6:27 AM

avik das......

if 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.

Reply

Davidraja J E Sam June 15, 2013 at 10:32 PM

hi Ankit could you please explain the second case..

David

Reply

Rhishabh Surit June 28, 2013 at 11:32 PM

davidraja....

if 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)

Reply

jjkljlj July 23, 2013 at 1:45 PM

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Munish Kaul July 23, 2013 at 1:52 PM

aa you are very close to being right if market credit = 2.5 lac

for 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 ???

Reply

Madhav August 11, 2013 at 2:46 PM

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=2,50000-

58300=191700.....So,

roi comes to be 6.7%..I think so...

chandan kumar bal September 10, 2013 at 1:24 AM

Hi what is the healthy ROI for FMCG Distributors(as u told margin is between

6%-8%)? Is it between 14%-24%?

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