Illustrative scenario on fictitious data; the companies and figures are not real.
Finding profit leakage
Type of business: Home appliance manufacturer (fictitious)
Sales have grown but the gross margin has fallen for four quarters in a row.
1Problem
The CFO knows the margin has shrunk, but not which product, customer or pricing decision is responsible.
2Data
- Sales invoices with discount details
- Standard and actual cost of each product
- Freight costs and sales returns
3Analysis
- Building a profit bridge: splitting the change in profit into price, volume, mix and cost effects
- Calculating the net profit of each customer after discounts, freight and returns
- Comparing standard and actual product cost
4Finding
In the sample data, tiered discounts given to increase volume had pushed the margin of several best-selling products close to zero.
5Action
- Redesign the discount policy around the profit of each order
- Add profit margin to the sales team performance report
- Review the prices of loss-making products
6Result
In this scenario, managers see profit at product and customer level for the first time, and pricing decisions are made on that basis.