The Long Sale Maintenance Level Theorem in Excel

The Long Sale Maintenance Level Theorem is a crucial concept that aids in strategizing and optimizing sales efforts over an extended period. This theorem is particularly relevant for businesses with long sales cycles and helps in determining the minimum sales level required to sustain operations and growth. In this article, we will delve into the basic theory, the procedures involved, and provide a comprehensive explanation with a practical scenario backed by real numbers. Furthermore, we will employ Microsoft Excel to demonstrate the calculations and discuss alternative approaches.

The Basic Theory:

The Long Sale Maintenance Level Theorem posits that businesses with extended sales cycles must maintain a
certain level of sales to cover ongoing operational costs and ensure sustainable growth. This maintenance
level is determined by considering fixed costs, variable costs per sale, and the desired profit margin.

Procedures:

1. Identify Fixed Costs: Determine all fixed costs associated with the business,
   including rent, salaries, utilities, etc.
2. Calculate Variable Costs Per Sale: Determine the variable costs incurred for each
   sale. These costs may include production costs, marketing expenses, and any other costs directly tied to
   making a sale.
3. Establish Desired Profit Margin: Define the desired profit margin as a percentage of the
   total revenue. This represents the profit that the business aims to achieve.
4. Apply the Formula: The Long Sale Maintenance Level (LSML) is calculated using the
   following formula:

      

Explanation:

Let’s break down the formula:

• Fixed Costs: Total fixed costs incurred by the business.
• Variable Costs: Variable costs associated with each sale.
• Revenue: Total revenue generated by the business.
• Profit Margin: Desired profit margin expressed as a percentage.

Scenario:

Consider a software development company with fixed costs of $50,000, variable costs per sale of $2,000, and a
desired profit margin of 20%. Let’s assume the company aims for a revenue of $300,000.

Calculating this using Excel:

            =50000/(1-(2000/300000)-(20/100))

Result: The Long Sale Maintenance Level for this scenario is approximately $68,966. The
company needs to maintain this level of sales to cover fixed costs, variable costs, and achieve the desired
profit margin.

Alternative Approaches:

1. Sensitivity Analysis: Conduct sensitivity analysis by varying input parameters to
   understand how changes in fixed costs, variable costs, and profit margin affect the LSML.
2. Break-Even Analysis: Use break-even analysis to determine the minimum sales required to
   cover costs without making a profit.
3. Dynamic Models: Consider building dynamic models in Excel that incorporate changing
   variables over time, providing a more realistic representation of business dynamics.

The Long Sale Maintenance Level Theorem is a valuable tool for businesses with extended sales cycles. By
understanding and applying this formula in Microsoft Excel, businesses can make informed decisions to sustain
operations and achieve profitability. Additionally, exploring alternative approaches enhances the
flexibility and robustness of strategic planning in the ever-evolving business landscape.