Calculating Distributor or Dealer ROI

This is a post that is written on gyaanokplease.blogspot.com and the link to the original article is here. I just cannot emphasize enough about how well this article has been written and hence I’ve included even some of the comments. Thanks to gyaanokplease for this post.

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:

  1. RoI or Return on Investment = Returns/ Net Investment
  1. Returns = Earnings – Expenses
  1. Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)
  1. 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.

  1. 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

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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39 comments:

    1. AnupriyaJune 14, 2012 at 8:50 PMReply
    2. 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.

Replies

Reply

    1. KaushikJune 14, 2012 at 8:53 PMReply
    2. Thanks Anupriya! Duly noted 🙂
    3. KiranJune 14, 2012 at 11:19 PMReply
    4. 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%
    5. KaushikJune 14, 2012 at 11:33 PMReply
    6. Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also!
    7. Sambhav JainJune 14, 2012 at 11:48 PMReply
    8. Very Well Explained.!Thanks
    9. Ashish ShahJune 15, 2012 at 12:05 AMReply
    10. Very helpful. A much needed initiative. Thanks Kaushik! 🙂
    11. Tirthadeep DharJune 15, 2012 at 7:02 AMReply
    12. 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

    13. Capt.KrunchJune 15, 2012 at 8:52 AMReply
    14. 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

    15. Tirthadeep DharJune 15, 2012 at 10:47 AMReply
    16. Sure would love to contribute… but I would rather start by trying and provide some comic relief between intense FMCG sessions 😛
    17. Amber VermaSeptember 26, 2012 at 7:15 PMReply
    18. Thanks All of you.re,
      amber verma
    19. Kapil GuptaFebruary 8, 2013 at 4:26 AMReply
    20. Realy good explained ….Thanxxxx
    21. Robin Godara BishnoiFebruary 21, 2013 at 9:46 AMReply
    22. thanks dear
    23. vibhor srivastavMarch 4, 2013 at 12:06 AMReply
    24. very helpful…..thanks….for explanation of ROI insuch a way….
      thanks………….
    25. avik dasMarch 20, 2013 at 10:51 AMReply
    26. Can anybody exactly explain following-
      per month
      Sales: 10 Lac
      Margin: 3%
      Inventory: 2.5 lac
      Market credit: 2.5 lacCase 1: No credit from company to distributor
      Case 2: 7 days credit from company to distributor
      Case 3: 30 days credit from company to distributorPls explain the concept also

      Thnx

    27. Ankit DwivediApril 12, 2013 at 6:14 AMReply
    28. 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%

Replies

Reply

    1. Ankit DwivediApril 12, 2013 at 6:27 AMReply
    2. 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.

Replies

Reply

    1. Davidraja J E SamJune 15, 2013 at 10:32 PMReply
    2. hi Ankit could you please explain the second case..David
    3. Rhishabh SuritJune 28, 2013 at 11:32 PMReply
    4. 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)
    5. jjkljljJuly 23, 2013 at 1:45 PMReply
    6. This comment has been removed by the author.
    7. Munish KaulJuly 23, 2013 at 1:52 PMReply
    8. aa you are very close to being right if market credit = 2.5 lacfor 7 days market credit = 75% of inventory
      = 75/100*2,50000 = 1,87500total 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 ???

Replies

  • MadhavAugust 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 balSeptember 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%?
  • AyushNovember 19, 2013 at 8:08 AM
  • 30 days inventory is 2.5 Lakhs
    so 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%

Reply

  1. vickyNovember 13, 2013 at 2:39 AMReply
  2. HI can any one confirm the standard norms for the ROI & Investment.If some one having please share @ vikasmendi@gmail.com
  3. Bipin BhanushaliFebruary 7, 2014 at 9:14 AMReply
  4. can anyone clear my following doubt
    Investment 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
  5. pranoy paulApril 10, 2014 at 12:05 AMReply
  6. thanks dear
  7. KapsMay 11, 2014 at 2:51 AMReply
  8. This comment has been removed by the author.
  9. KapsMay 18, 2014 at 11:42 PMReply
  10. Hi..Can someone help me crack this..
    Distributor 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.
  11. himanshuOctober 14, 2014 at 1:24 AMReply
  12. In both case it will be 38.4 % annual Roi1st method 160000 *100/ 500000 = 3.2 monthly Roi or 38.4 annual Roi2nd method 2400000/5000000 = 4.8 rotations , Earning per rotation 8 % hence annual Roi will be (8*4.8) = 38.4% only
  13. himanshuOctober 14, 2014 at 1:25 AMReply
  14. in first case read denominator as 50 lac and not 5 lac
  15. Ramaswamy VenkataramanApril 18, 2015 at 1:20 AMReply
  16. in the second case shouldn’t the numerator be the annual turnover ?
  17. qamar khanJune 7, 2015 at 1:36 PMReply
  18. thanks
  19. AdarshSeptember 12, 2015 at 12:40 AMReply
  20. Was going through the comment section and found someone mentioning interest charges on CC or OD being part of the expenses. This is a valid point of discussion and I have personally faced such scenarios.
    Humbly request the author to give a verdict on this. My understanding and opinion from many with whom I have shared is…Is a dealer who continuously needs CC or OD to fulfill his billing commitment, a sound dealer/distributor?
  21. UnknownMarch 14, 2016 at 9:43 AMReply
  22. Can anybody explain the followingAbc is a fmcg companyxxx 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

  23. biswa nayakApril 12, 2016 at 10:24 AMReply
  24. ANYONE KNOW THE Healthy ROI for the FMCG channel partner??

– See more at: http://gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html#sthash.8n84hH77.dpuf

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