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.
The secret to increasing profitability: allocating costs accurately
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.
When feeling replaces data
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.
How to increase profitability through knowledge
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.
It’s time to act
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.
Fill out the form below and find out how we can implement a strategic management approach that transforms your business results. We’re ready to help you reach new heights of success.
Do you know the profitability of your company’s customers? This is a crucial factor that could be directly impacting your financial results. Many companies focus solely on revenue but overlook customer profitability analysis, compromising their overall profitability.
Let’s explore how to identify unprofitable customers and implement strategies to improve your business results.
Why is Customer Profitability Important?
The customer with the highest revenue isn’t always the most profitable. A study by Harvard Business School found that 20% of customers are highly profitable, 70% are neutral, and 10% are extremely unprofitable.
This happens because many costs associated with serving customers, such as sales visits, personalized campaigns, and specific demands, are not properly measured. As a result, resources are consumed in sales that ultimately generate losses.
Commissioning Based on Profit: A Strategic Solution
A recommended practice is to adjust the commission structure for salespeople, basing it not only on revenue but also on how profitable each customer is. An efficient model could include a split, such as 60% based on revenue and 40% on profit.
This approach encourages salespeople to prioritize more profitable deals, optimize visits, reduce unnecessary discounts, and increase negotiation efficiency.
Identify Customer Profitability and Adjust Actions to Achieve Better Results
The first step is to identify which customers are profitable and which are generating losses. From there, corrective actions can be implemented, such as renegotiating contracts or reevaluating service efforts. Companies that do this stand out, gain competitiveness, and increase their profit margins.
Know Your Results and Develop Better Strategies
Understanding the return generated by your customers is essential for ensuring the sustainable growth of your business. Before offering discounts or prioritizing large orders, ask yourself: is this customer contributing to my company’s revenue or profit?
Fill out the form below to speak with one of our specialists and learn how to analyze each customer’s profitability to improve your results!
Organizational management is a vast and complex field, and the diversity of software available to support operations is remarkable. Each type of software plays a unique role, serving specific needs. Therefore, MyABCM stands out as a specialized solution that excels in addressing specific challenges of cost and profitability management in companies, not as a substitute for BI tools, despite having embedded BI to benefit companies without a BI solution.
Purpose: difference in function and focus
While BI generates dashboards that merely compile and display information obtained from other software and data sources, MyABCM processes and transforms information cubes, cross-referencing and calculating from various sources to then generate new data that can serve as a basis for cost and profitability management, providing vital reports for decision-making. Thus, it plays a more strategic role, offering features that enable understanding the actual costs of the business across different dimensions, such as channels, customers, activities, and specific products, etc.
In other words, the goal here is to minimize the use of cost allocations throughout the organization and, consequently, eliminate the terrible distortions linked to these allocations that can be very dangerous for companies, impacting various managerial decisions on pricing, sales commissions, discounts, etc.
A BI, on the other hand, seeks existing data in the organization such as Accounting Accounts, Production and Billing Volumes, periods, and others, and presents this information in an organized and didactic way. However, note that here there is no transformation of information, and therefore, the allocations continue to occur. For this reason, Prof. Bala Balachandran from Kellogg University in the United States often comments that “these increasingly sophisticated BI systems allow extremely misguided decisions to be made very simply and quickly!” which is a danger!
Let’s see an example:
Imagine a factory that produces various products from the same raw material: plastic. The ERP records data such as the value of input purchases, payroll, accounting entries, production and billing volumes by product and customer. Potentially, we have here a flawed cost model, since allocations were used for the costs of support areas and, although we know precisely the billing customer by customer, this information is of little use when we want to understand the result customer by customer, after all, we do not have information on the “costs of serving”, we did not allocate marketing and sales expenses for these customers and channels and we do not even know to which areas the IT expenses are being allocated in the organization.
MyABCM, in turn, allows for a sophisticated modeling of costs and profitability, which essentially consists of designing a structure where the various accounting accounts of the company are allocated using allocation criteria that make sense and respect a cause-and-effect relationship through multiple levels until reaching the dimensions necessary for the client to manage their company. These dimensions may include Products, Customers, Channels, Markets, Projects, Businesses, Segments, etc., and also include the costs of support areas. In this way, we have a complete snapshot of costs with full traceability that allows managers to make the best business decisions based on facts.
And if you already have or intend to use a BI, do not worry. MyABCM integrates with all of them.
Implementation: ease and focus on cost modeling
MyABCM stands out for its ease in the process of construction and data loading in the cost modeling structure. While BI software generally requires complex and extensive configurations, MyABCM is a ready-made calculation engine that requires only parameterization, without the need for development, simplifying implementation.
Functionalities: what does MyABCM do that bi’s don’t?
Powerful Calculation Engine
MyABCM has a robust calculation engine, optimized specifically for the requirements of cost and profitability management. Designed with a specialized distribution mechanism, it is capable of in-memory calculations, optimizing appraisal time.
Scenario Creation
The scenario-building function allows users to create and explore various hypotheses, providing a broader view of the financial implications of different situations.
Push and pull simulation
Within the scope of scenario simulations, we have another important differentiator of MyABCM: push and pull simulations. The push simulation involves the sequential propagation of changes in variables throughout the model, to understand what the final result would be if some variables were changed. The pull simulation, on the other hand, goes back to identify the initial conditions necessary to achieve specific results, identifying bottlenecks and capacity constraints, and acting as a true sophisticated planning component in organizations.
This approach provides a deeper insight into the financial implications of different scenarios, allowing not only to anticipate changes but also to retroactively understand the factors that led to certain outcomes. This capability goes beyond the possibilities of BI’s, which do not perform such detailed and sophisticated analyses.
Cost monitoring:
MyABCM offers detailed cost monitoring in different contexts, including Actual, Budgeted, Standard, and Goal, providing a holistic view of financial performance.
Reciprocal allocations:
MyABCM is the only solution on the market that manages reciprocal costs in all modules and with optimized performance at the computer processor instruction level, an essential resource in interdependent organizational environments. By allowing allocations between sectors that share services and resources, MyABCM offers a more accurate and realistic view of costs.
As an example, imagine here that the IT area works for HR and also for Production; already the HR area also works for IT and for Production; note that between HR and IT we have a simultaneous cost allocation that must be calculated in order to avoid distortions in costs – MyABCM deals with this transparently and with extreme agility.
This process goes beyond the cost calculation tools offered by BI’s. The ability to handle interdependencies between sectors, essential for the financial health of the business, is not contemplated in BI’s, precisely because it does not align with their objectives.
Reports: a detailed and customized view
BI software is powerful in generating reports. However, they depend on other tools to generate advanced calculations for cost management. MyABCM, on the other hand, offers the ability to create specific reports, tailored to the needs of cost and profitability management of the organization. This allows for a more in-depth and targeted analysis, optimizing the decision-making process.
Moreover, MyABCM offers integrations with other systems, such as ERPs and BI’s themselves, facilitating use in conjunction with various tools employed in the organization.
Ultimately, when choosing between BI software and a specialized solution like MyABCM, organizations should consider their specific needs for cost and profitability management. With its focused approach, advanced functionalities, and ability to provide precise insights, MyABCM stands out as a strategic choice for companies seeking more accurate and efficient financial management.
Learn more about how MyABCM can help your organization. Fill out the form below and talk to our experts!
There are various system options for cost calculation in SAP, varying in value and features.
In this article, we will introduce a Brazilian alternative that not only integrates seamlessly with SAP but also specializes in cost and profitability calculation, offering numerous advantages for your organization.
MyABCM: available on the SAP Store
For companies looking to optimize cost calculation in SAP, MyABCM stands out as a specialized option with many attractive features. Available on the SAP Store, the system integrates smoothly with SAP and offers a series of functionalities that allow companies to get a snapshot of their cost structures, simulate scenarios, and make more confident decisions.
Benefits of MyABCM
MyABCM offers a series of advantages for companies wanting to efficiently calculate costs and profitability:
Cost-Effectiveness for SAP cost calculation
While many available solutions may represent a significant cost, MyABCM is more affordable, delivering valuable and efficient features. This makes it an attractive option for companies of various sizes, enhancing the return on investment.
High Traceability of Costs
MyABCM is notable for its ability to provide a high degree of cost traceability. This is essential for companies that want to understand the origin of their expenses, optimize pricing, comprehend the role of each product, service, and customer to the organization, and make informed decisions based on accurate data.
Agility in Calculations and Information Availability
The ability to gain insights in less time is invaluable for companies that need to make agile decisions in a dynamic business environment. One of the major benefits of MyABCM is the speed of implementation, calculations, and information availability, combined with smooth data integration between SAP and its system.
Used in Over 50 Countries
MyABCM is used by large companies in more than 50 countries to calculate costs in SAP, covering a wide variety of sectors, including banking, industrial, governmental, healthcare, and many more. This global adoption is a confirmation of its effectiveness in meeting the needs of organizations of all sizes and in different segments, with flexible tools that adapt to the specifics of each business.
Optimized cost management on the SAP Store
For companies looking for specialized solutions to enable integrated cost management within the SAP ecosystem, MyABCM stands out for being accessible and offering functionalities specifically developed to optimize the identification and calculation of costs, with excellent cost-effectiveness. Make this strategic decision: fill out the form below and speak with our experts.
Let’s recapitulate some trivial points that underlie “Activity-Based Costing”.
Control associated with direct and indirect costs;
Allocation criteria respecting a cause-and-effect relationship
Robust data analysis;
Identify all activities related to services / products, customers and channels;
Traceability of expenses;
Accurate information for decision making;
And much more.
If you are already familiar with the term, let’s go ahead and discuss why ABC (activity-based costing) has the power to increase your profitability.
What is the main objective of the ABC method?
Let’s get right to the point.
The focus of the ABC method is to have maximum control over the indirect costs (also called overhead) as well as the direct costs associated with a product, service, customer, or channel.
Through a costing system using drivers that respect a cause-and-effect relationship and aiming to bring an advanced analysis of the costs per activity within the operation.
And with this dense range of data, intelligently filter the numbers and transform them into strategic decisions.
Data-driven decision making
The first step comes from what we call “data-driven culture”.
This is the natural habit of ALWAYS making decisions based on collected data and not on a gut feeling.
It all starts by identifying the main KPIs (key performance indicators), which are our key performance indicators.
Do I need KPIs?
If you intend to make decisions based on data and not just intuition, yes.
Performance indicators make it possible to measure how much a strategy is generating the expected result or not.
It is important to mention that KPIs are always measurable and concrete.
My data is not conclusive, now what?
Analyzing data is something automatic in large companies, however, not always creating strategies and defining next steps is provided by a study on top of what has already been collected and digested.
The ABC costing method is useful for companies that already have this data-driven culture and are looking for optimizations through detailed data analysis.
The more knowledge you have about how much and where your resources are being spent, the more precise your improvements associated with cost management will be.
And that is what we at MyABCM offer.
Pricing
The ABC method results in an advanced costing analysis based on each activity involved in producing some product, providing some service, or serving some customer or channel.
This is where pricing comes in.
One of the biggest challenges within a business can be made easier by applying the ABC method.
Keep in mind that failing to calculate your total costs can result in sub-optimal pricing, resulting in an unfavorable profit margin for the company.
With all the control of segmented expenses in the palm of your hand, pricing becomes clearer and effectively correct. The consequence of this is the real impact on negotiations with customers, discount policies and commissioning of salespeople, resulting in the end in greater profit for the company!
ABC Advantages:
1. Reliable and accurate data throughout the value chain
The option of being able to precisely manage all the organization’s costs. This opens up the possibility of making more assertive decisions about where to act to reduce costs, invest, and even serve the best channels and customers from a profitability standpoint.
2. Associate overhead costs with the products, services, channels, and clients that actually consume it
Instead of associating the same cost to all products, services, customers, and channels, you can allocate the fair value consumed by each.
This also helps identify costs that apply to more than one segment, making this feature more valuable because it potentially eliminates distortions in cost calculations.
3. Evaluate production efficiency and apply improvements
The ABC method makes it possible to assign value to overhead costs by working the data as if it were direct costs. By breaking down overhead costs and assigning them by activity, we can look for breakthroughs with precision.
In the same way, we can make processes more efficient and correctly monitor the key KPIs for each activity in the organization.
4. Accurate data to obtain the desired profit margin
Having accurate data will directly impact a leader’s decision making. It opens up the possibility to reduce or shift production costs and apply effective pricing strategies to obtain an adequate profit margin.
5. Unique Benefits
Other methods cannot cover what the ABC costing method provides.
Directly related to the particularity of activity-based costing, it can measure expenses related to activities, however small they may be.
How do I know if I should use an ABC system?
All the questions below must be answered with a yes.
Do you have a diversity of Products and Services?
Diversity of Customers and Channels
Diversity of Processes?
Your overhead costs are high, and you have difficulty in allocating them correctly to products, services, customers, and channels?
Do you notice that your margin has been falling in recent years, often even though you have higher revenues?
Do you use data to make decisions?
Do you have pricing problems?
Then you are prepared.
To be clear, there are not only advantages.
But it is the solution to a number of complex problems for those seeking cost optimization through a robust system.
After you have finished reading this post, you certainly have the clear answers as to how ABC cost management can increase your profits.
In a competitive market, many companies need to invest in competitive advantages in order to increase profitability and improve efficiency. (more…)
Understanding how to calculate the rate of return and profitability of a business is critical for managers to clearly visualize the company’s financial situation. Managers commonly confuse these two terminologies, but they represent distinct aspects of the company. You need to know how to increase both if you want to ensure your business success.
If you have any questions about this subject, keep reading this publication. We will explain the concepts of these terms, their importance to the company, how to calculate them, and finally, which techniques are most effective in applying them. Check it out!
What is the difference between the two concepts?
First, it is important to understand that both are indexes that relate to the company’s net income. For this reason, they are constantly confused.
However, the result shows gains from different perspectives. Check out below what each of these concepts aims to achieve.
Rate of return
Rate of return is a percentage value that relates an initial investment and the speed at which a business gets its financial return.
Thus, if the rate of return is low, it means that the project invested is dispensable for the company; if its value is negative, it is causing losses, and finally, if its number is high, it is very beneficial to the company’s finances.
Profitability
This measure, also given as a percentage, shows how much a business effectively received in relation to the overall enterprise’s gains.
While the rate of return shows the return on investment, profitability shows all that has been achieved, taking into account projects, savings, sales, revenues, and other elements of the enterprise.
How important is it to understand the difference between the concepts?
Evaluating just one of these aspects will bring a poor overview of the business, giving a false impression that it is successful. That way, the controller will not have actual data on the enterprise’s gains, resulting in losses and even bankruptcy.
For example, it is possible that you have high profitability, but due to factors other than an investment. That way, you will not know if the project is profitable or not; it may be causing losses that you don’t know about, and that is a waste of capital.
Knowing how to calculate these indexes ensures the correct profit determination. This has a positive impact on the enterprise’s decision-making, since they will effectively provide the healthy growth of the company.
How to calculate rate of return and profitability?
Rate of return
Rate of return considers time as a fundamental variable. Usually it is calculated by relating the month and its corresponding cash flow. Another variable involved is the initial investment, and the formula is given as follows:
Rate of return = (net income in the period / initial investment) x 100%
Thus, let’s consider a business that required an initial investment of $400 million. Currently its monthly cash flow is about $25 million. In this instance, the monthly rate of return is given by:
Rate of return = (25/400) x 100%
Rate of return = 6.25%
A business is not profitable when this index is null or negative, which indicates that the investment has led to losses. On the other hand, the higher a business’s rate of return, the faster there will be a return on investment.
Profitability
In turn, to find a business’s profitability, you need to think in terms of turnover and net income for the period being analyzed. The relation is given by:
Profitability = (net income / total turnover) x 100%
Imagine, for example, that in one year a company had a turnover of $500 million. The gross income was $300 million and the net income $200 million. In this instance, the profitability would be:
Profitability = (200 / 500) x 100%
Profitability = 40%
This means that profitability depends much more on net income than on turnover, given that a very high turnover associated with low income lowers this index.
To better understand it, imagine the same situation, but in this case the income was just $100 million. Profitability would decrease to a half, even though the turnover remains the same.
How do you increase these indexes?
It is possible to act on these indexes so that they are increased or are more in keeping with management’s expectations.
Increasing profitability
These measures consist of making new investments whose returns can be measured. Here are some examples.
Segment the audience
Customers are the focus of any business, given that the revenue to sustain it comes from them. Markets are currently very crowded. In order to ensure that a particular audience will always acquire your brand’s products, you can develop goods and prepare a marketing action for a very specific consumer profile.
Create techniques to increase productivity
There is always room for maximizing employee productivity, whether by changing materials, exchanging staff, automating process, among other methods.
Negotiate prices with suppliers
Good negotiation can be exceptionally beneficial to the company. If you have a good relationship with a trusted supplier, try to negotiate lower prices with them. For example, you can offer a loyalty scheme to always acquire your raw material with them in exchange for a reduced price.
Maximizing profitability
Here we will show the main methodologies that increase the overall net income of the company; check it out.
Reduce operating costs
This strategy increases both the rate of return and profitability. Operating costs are those needed to keep the enterprise active, such as wages, electricity, etc. Reducing these expenses will result in an increase in the company’s profitability, not an increase in revenue.
Implement continuous improvements
There are numerous strategies and technologies that can be applied in the company: the biggest mistake a manager can make is to not continually seek improvements. These can be a better structural organization, computerization of the enterprise, use of new indexes that aid in decision-making, etc.
By using financial software, processes become faster, simpler and more accurate. With less time lost, there is more productivity, leading to gains in both rate of return and profitability.
Review sales prices
Customers’ taste, product values, and tax rates go through constant changes. Thus, the price of your goods or services should also be updated to keep up with the market.
Depending on the scenario, your products’ values could be higher, which would generate more profits, but it would also be feasible to reduce your prices in order to expand your customer network. This study will maximize profitability.
You can see that understanding how to calculate the rate of return and profitability allows you to have a real and transparent view of the business, and also ensures a more accurate and concrete decision-making. After reading this publication, you will know exactly how to use this knowledge to foster the company’s growth.
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