Every year the company submits to the shareholder’s approval a revenue and expense budget. The Management designs this “BVC” (Buget Venituri & Cheltuieli) using an ‘bottom-up’ approach – beginning with the evaluation of the ongoing projects (of the available sales pipeline at the time of the production of the BVC), of the sales statistics of the previous years, of the marketing and sales already engaged / planned actions, and of the sales targets assumed by each member of the sales team. In other words, the BVC is realized in a prudent way.
On the other hand, what we follow and measure in the relationship with the sales team and with any other partner is the commercial GROSS MARGIN and not the sales amount. This way, in every year, at the publishing of the BVC, the management has to answer to the “If we have a reasonable thrust that we will generate 100 RON gross margin, of how many RON we will obtain this margin?” question. It must be taken into consideration that the sales organization is measured and appreciated EXCLUSIVELY by the generated gross margin volume. In other words, 100 Euro of gross margin generated by selling a 200 Euro course is as valuable to the company and is, therefore, rewarded the same like a 100 euro of gross margin from a sale of 500 euro in communication solutions.
In order to answer to the question “How much do we have to sell in order to produce the 100 RON gross margin?” question, we must therefore intermediately answer to the “which will be the average percentage of gross margin registered by the company?” question. According to the prudence principle, the management applies small percentage decreases to the already registered gross margin, in order to find out the answer to this question.
The counterintuitive result of these cautious estimations is that, if we apply a smaller margin percentage, then we actually assume that we will have to ‘work’ more for the same RON gross margin, so the forecasts (the BVC) related to the company’s revenues are HIGHER.
Although, the company follows only the gross margin, not the volume of sales, that is why during the budget exercise is more likely that the revenue forecasts (turnover) to be wrong, and the profitability ones to be more accurate. In other words, the management does not aim, does not follow, and does not reward the achievement of any revenue targets and, in consequence, the investors should not follow and evaluate the company’s aim of the revenue indicators (turnover), but of the profitability indicators.
We are a small but fast developing company. We work with projects, not with recurring sales. This means that sales and profitability results can vary from month to month. Our activity is somehow cyclical and concentrated in the 4th quarter. We believe it is more important to produce a fair estimation of the profitability, and then follow that target instead of constantly trying to revise estimates regarding our ability to obtain the results. “The game is won by those who pay attention to the field not the scoreboard”.
Therefore, we intend not to publish quarterly estimates or prognosis, or any other document besides the yearly Revenue and Expenditure Budget.