Which products are the most profitable for your company? Are there products that are costing you more money? It is crucial to comprehend your profitability for each product line if your business manufactures, distributes, and/or sells different product lines or product variants. You run the risk of making poor sales judgments without this knowledge.
The fact that profitability management is typically not overseen by anyone is one of the peculiarities of corporate management. CEOs are responsible for company-wide financial targets and assign profitability to business unit owners. Budget owners set cost and margin goals and sales quotas to accomplish revenue goals. Setting profitability goals is different from managing it. Profitability management blends finance and sales to maximize revenue and margins. This data- and analytics-based performance management solution routinely achieves improved sales and profitability. One-third of firms will have embraced profitability management by 2025, according to Ventana Research.
In this article, we’ll show you how Credo CFO’s strategic advisory role benefited a client as we framed their challenges and analyzed their business profitability.
The Client’s Business Challenge
We met this client a few years ago and at that time, they were just starting to become profitable. They had multiple offerings and a profitable product, but they didn’t know which of these products are giving them the most profit. It is important to understand profitability in a business. And so it is vital to understand how much money each product makes after deducting the costs of manufacturing, selling, and supporting it. This client lacked the information which determines which products are making or losing money.
Based on the information that they had, what we presented to this client are details that provide a more accurate and analytical view of their business’ cash flow and processes. We helped them understand things like how profits should be grouped and how line items should be structured in accounting, how the products are sold, and which should be sold or not based on a profit analysis. Understanding and utilizing transactional accounting is a critical step in proactively managing a growing ecommerce business. And the client said, “Wow, I’ve never thought of my business this way!”
Profitability Analysis and Credo’s CFO Solution
As part of our initial engagement, we formulated a relationship and we leveraged that relationship to them by asking how else we can help their business. Making sure we measure profitability not just in aggregate (because the aggregate is really important especially in the pass-through entities such as LLC corporations where all the profits go to the owner and that person has to pay taxes on it). Putting taxes aside, we wanted to track products 1, 2, 3, and N to see if revenue was properly identified on each.
Rapidly growing companies aren’t doing it. They have the tendency to not accurately record all revenue and expenses as they are incurred because of the inconsistent nature of tracking the transactions. Recording all transactions as they occur, even before cash is received or paid, is essential if you work with multiple vendors.
This will help you get a full picture of all anticipated cash inflows and outflows and put you in a better position to comprehend the real situation of the company’s operations.
One thing we learned about this client is that the step function cost in the SG&A was hurting their profitability. The goal of our CFO services is to set the tone and mood of the business by product line. Thus, this client was able to plan for their extra resources to come on board while working with their operations people. And what we’ve shown this client is that one method of cost control is to keep an eye on SG&A costs; an increase may indicate that selling or administrative costs need to be reduced.
Strategic business decisions will increasingly take financial considerations into account as a company develops and grows. With the help of Credo’s CFO services, this client was able see the big picture and make decisions more effectively. We’re not just making spreadsheet worlds; we’re actually putting real collaboration with our clients into practice. We help you with the financial model and the kind of resource that our clients need. We also go the extra mile of letting them know if their team is falling apart and if they need more resources. We tell our clients how the extra people will affect their finances or what kind of revenue growth is needed to pay for them. And going through this exercise with the client is great because then we can start to figure out the net income per product.
We had a great time collaborating with the client’s owner on their case study. We used the data to make decisions as we tried to determine the value of contribution of each product, the impact of giving incentives to the sale of a particular product, which product is a lost leader, and the cost of manpower that’s contributing to the loss. So in that process, we were able to decide whether to raise prices or negotiate with the vendor to cut costs. Our strategies helped this client do great work. Lack of support and structure caused a train wreck. We threw so many resources at their product lines and implemented a management system (or managers in place). Since we had focused execution, noise and customer complaints dropped and profitability rose. When we started dissecting financials, we eventually learned what actions were needed and which products were doing well.
This is the Credo story showing how important it is to have great books and records and how the CFO should work well with the client’s CEO or COO or whoever senior level person to interpret those information to see what their financials are telling them. From then, we can plan your design, intent, and level of aggression.
That’s the kind of mentality that we bring at Credo. And it’s the type of value that we add to our clients who candidly are so busy and are just trying to do the basic. It’s hard to slow down and really critically analyze these things much less frame it in a way that’s actionable. And this is one of the many value points that a Credo CFO can deliver.
You can boost your company’s operating success with this knowledge and a game plan. This plan lets you differentiate and grow profitable goods and segments while improving, outsourcing, or divesting underperforming ones. Knowing where to concentrate your efforts and resources can lead to better strategic decisions.
Contact Credo for a product and profitability analysis and strategy plan.
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