Transactional savings calculations

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    I have a project which has increased sales of a praticular type of contract. Is it common practice in the six sigma world to deduct the cost of the sales person’s commission from my reported project financials?



    This would depend on your company’s particular accounting rules.  In general, I would presume the commission to be part of the sales, and so would need to be deducted from the savings.  However, your accounting system may already have dealt with that some other way.
    Different companies have different ways of dealing with things.  In companies where labor represents a tiny portion of the cost, labor is often ignored or counted as some fixed percentage, because actually tracking the time can be a significant cost.  In some products, though, labor is practically the entire cost.  Counting raw materials might not be worthwhile in those cases.
    So talk to your accountants.  It is going to depend on your company’s particular situation.



    I’ve seen it done both ways.  My personal experience with sales centric businesses, marketing/sales managers (sponsors) are quick to acknowledge any and all savings as the means to associate savings/growth is often very inexact.  Conversely, financial people (and operations folks to a lesser degree) typically would want the commissions “netted out”.
    My current employer values all projects from an Economic Value Add perspective which is depicted in the following formula:
    EVA = NOPAT – Capital Charge
    Where NOPAT = NEBIT – Economic Taxes
    (NEBIT = Revenue – Cost)
    And Capital Charge = Capital Employed * Cost of Capital
    (Capital Employed = Fixed Assets + Working Capital)
    Bottom line it depends how your company derives project savings and more importantly, if the project sponsor buys in to your numbers.  I suggest you assess the project sponsor and the true decision makers in your business to determine their risk aversion, develop a spreadsheet that includes forecasted savings, and present it as a proposal.

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