Discovering how to increase profitability is a key concern for any company, especially in increasingly competitive markets facing growing management challenges. One of the keys to achieving this goal lies in the efficient handling of indirect costs, eliminating distortions that can compromise margins and strategic decisions.
Between 20% and 40% of a company’s products or services can incur losses without it being noticed. This often happens due to failures in allocating indirect costs, which are becoming increasingly significant in diversified organizations.
Studies show that many companies rely on methods such as volume- or revenue-based allocations, while others skip allocation altogether, relying solely on gross margin. Worse still, many times the distribution is based on feeling, depending on what managers believe should be assigned to each product, service, or activity. This approach leads to inaccurate decisions affecting pricing, commercial discounts, and even strategic direction.
Management based on feeling may seem adequate but often results in distortions that harm profitability. Common surprises include discovering that the company’s most profitable client is undervalued, or that the best-selling product generates losses. These issues are prevalent in businesses that neglect analytical methods for cost allocation.
Surprisingly, this doesn’t just happen in small businesses. We’ve implemented projects for a multinational with billions in revenue, where almost 30% of costs were allocated based on the feeling of managers.
Relying on intuition can mask the true efficiency of processes, increasing the costs of activities that don’t add value to customers and reducing competitiveness in the market.
Adopting a data-driven approach is crucial to optimizing costs and finding ways to increase profitability in your company. Analytical tools and structured methods reveal the reality of every aspect of the organization, enabling the elimination of non-value-adding activities, precise resource redistribution, and maximized net margins.
This transformation allows companies to identify their most profitable products, services, and clients, redefine commercial policies, and direct investments toward areas with the highest return potential.
Keeping your company competitive and profitable requires moving away from intuition-based methods and adopting a management approach focused on efficiency. Now that you know how to increase profitability, it’s time to take the next step.
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