Where Does Your Business Really Make its Money?
•profit analytics •distribution management best practices •WayPoint reports •distribution industry technology •business math for distribution •wholesale distribution basic mathWednesday, November 5, 2014—Many distributors have limited visibility into where their companies are most profitable. Here are a number of the items that every company should be cognizant of as they look at the numbers for their distribution business.
The central metric in profit analysis is P&L (profit and loss), which tells you whether or not your company is making money. However, P&L can be complicated to calculate given the various logistical elements associated with operating the business from the time that an order is entered into your system to when it's shipped out of the warehouse (not to mention the cost of your sales force!) There are a few ways to keep track of this information.
Line item profit analytics (LIPA) is the best way of getting a system to tell you much make or lose money on every single entity in the business, whether it's a customer, a product, a product line, a territory, or a delivery route. Being able to identify your best customers and products is the first step in maximizing your profit potential.
Your normal accounting system won't help you manage inventory and receivables nor does it provide sufficient overall financial information to keep your bank and the IRS at bay. It was never designed to tell you where you make and lose money. This is something that requires a specialized system.
This sort of detailed information not only allows you to identify your profitable areas but also helps to determine what's causing your unprofitable areas to lose money. You can get an enormous amount of new profitability out of your business by catching the profits that are slipping through your fingers right now. Every sale that comes in has a certain amount of gross profit dollars that it generates and a certain cost-to-serve envelope that comes with it. By managing that cost-to-serve (CTS), you can improve each transaction's profitability.
Using LIPA, you can look right down to the individual SKU level to see where those SKUs made money or lost money, the reason for that profit or loss, and see the customer's margin. Doing this will give you a strong sense of where things are being improperly priced, the benefits of changing the pricing, and the potential impacts. These are insights that will help you to capitalize on your profitability and maximize your return on investment.
For more information about Randy MacLean, visit: www.waypointanalytics.net
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