Do you know how much profit each customer brought into your company last month? How about last year? People often look to their invoices and accounting software to answer these questions, but there’s more to customer profitability than that.
It’s easy enough to calculate revenue and attribute direct costs to customer accounts, but profitability and indirect costs are much harder to work out. Businesses can’t accurately calculate margins without a thorough understanding of their data or allocate indirect costs without a mechanism for doing so.
In this article, we explain how any business can take control of its data to identify profits and expenses, whether for a customer, office branch, or product.
The Big Profitability Picture
Customer profitability is often reduced to a simple concept: the Pareto Principle. This rule states that, in most cases, 80% of results actions will come from 20% of actions. In business, that’s assumed to mean that 80% of yield comes from 20% of clients. While there may be anecdotal evidence for this, it does not tell you who those 20% of your customers are, let alone what each customer individually contributed.
True calculations provide your gross profit, net profit, EBIT, and EBITDA for each customer, office, or product numbers each month. Not as a one-time exercise, but as a calculated KPI that is automatically available in your data warehouse.
When you have that data, it becomes easier to make informed choices about contracts and resource allocation, amongst many other things.
Covering Business Costs
While you can easily recognize and dispense the basic cost of products or services, it’s much harder to account for less tangible expenses. The marketing, sales, and operational expenses that allow your company to keep running are often hidden and are not invoiced to customers.
The fairest way to distribute these costs is to allocate them to clients based on operational indicators. It may take more resources to land and maintain a major account, for instance. In these circumstances it seems right that they should cover more of the expenses incurred by your sales teams than a smaller client.
It’s important to recognize and allocate these costs to understand and influence how valuable an account is. It will give you substantial bargaining power in the end because you understand the full value of what you’re providing.
Data-Backed Decision Making
In an ideal world, every negotiation, commercial plan, and business initiative would be backed by data to set out its budget. The problem is that few organizations have insight into which products and accounts are actually profitable once essential costs have been accounted for.
Mastering data is all the more important for struggling companies since it can pinpoint what must be done to improve their financial outlook. Profitability information can shine a light on when you should reduce budget allocation for a branch, which products are lucrative, and which should be stopped altogether.
Why an Educated Guess Isn’t Enough
Profit isn’t simply a representation of revenue, but that’s all that firms can calculate using accounting software alone.
Companies merely make an educated guess when they use basic profit calculations that fail to account for indirect costs. Office space, equipment, supplies, utilities, and even staff all make it possible for a business to serve its customers, yet they also cut into the bottom line. It’s impossible to accurately calculate the true value of a product or client without acknowledging those expenses.
Businesses need a more granular approach if they wish to make changes that boost their profitability. You can’t make informed decisions about the performance of a product or customer account unless you understand how many of your resources are being used. A client could spend €1 million on your products, but whether that translates into profit depends on what it took to close the deal.
With full oversight of indirect costs, it even becomes possible to reclaim them and improve your profit margins. Allocating a proportion of indirect expenses to clients in line with their use of resources could help to reduce the impact of overheads. In doing so, you can turn intangible business expenses into billable fees.
The Cohelion Data Platform takes your calculations a step beyond basic profit formulas to do all of this and more.
An Ideal Solution
The goal is to effectively calculate profitability information about a client, product, or branch of your company. The Cohelion Data Platform brings together revenue and operational data to swiftly calculate and report on profit.
It systematically combines, collates, cleans, and categorizes data from across all your systems to create a consolidated bank of comparable information. All of this makes it easier to get the complete picture, supporting decisions with results from the past and forecasts for the future.
Once these inputs are structured into a single platform you can build the calculations that will propel you onto the next stage of analysis. Our allocation engine even allows for the creation of multiple profiles so that you can compare the effects of different drivers on the cost allocation.
Users can configure their cost drivers, create custom scenarios, and make budget allocation plans that apply indirect overhead costs to specific customers. Beyond this, the Cohelion platform brings cost and profit margin data together in one convenient place, all without the need for complex Excel spreadsheets.
Staying Five Steps Ahead
The Cohelion Data Platform provides a fast and convenient way to assess key performance indicators. Unlike accounting software, its reports are not limited to purely financial information. We focus on a more holistic overview of your business’s revenue, expenses, and profit margins.
When armed with these insights you’ll be better placed to raise prices, cut costs, renegotiate terms, or change your strategy. As a single-source-of-truth solution, it also permits access to the right data, in the right format, to the right employees when needed. In other words, it empowers sales teams to negotiate to more favorable terms and business controllers to chart a course for success.
Find out more about the Cohelion Data Platform today, and see what it can do for your company’s profitability.