In this article we share tips based on our experience about how you can find extra profit from your own data. As in the previous article in this series, we will focus on the business of wholesalers.
As we mentioned previously, new advances in information technology have made data analytics affordable for companies of any size. To implement them you don’t have to sell your soul to Big Software and you don’t need a computer degree. But you do need relentless drive to make your business better.
Finding out the hiding profit
Watch gross margin trends
To live on the margin’s edge you have to be extra careful. Your ERP software should be able to record purchases and assign corresponding costs to each of your sales invoices. This profit information is extremely valuable but often locked behind rigid reports that are a pain to work with. When it is exported into a dedicated analytical database, you can slice and dice it by customer, product category, SKU and account manager. Most importantly, you must track changes over time and see if they are driven by margin variance, sales volume variance or the ever elusive sales mix variance.
Purchase price trends breakout by supplier
Another illuminating view is to see the actual prices at which you purchased a given product or SKU in a category over time. There are always variations due to shipping costs, inflation spikes, procurement errors or temporary switch to alternate suppliers. That is normal business as long as you’re aware of the trends and take actions to control them.
Taking full advantage of vendor discounts
One of the typical ways wholesalers generate extra margin is to take advantage of special vendor discounts. That’s not always an automatic decision since the goals of both businesses must align. To support such decisions, it would be useful to know the outcome of such campaigns though your perspective. You invested in inventory at a lower cost but were you able to sell it quickly? Did you have to liquidate it at a lower price?
The Holy Graal – net profit and return on capital analysis
How much of your net profit is generated by a given customer? What return on capital invested are you getting from that same customer? These questions can reveal important, dare we say strategic, insights. A customer that generates seemingly attractive gross profit may be too expensive to serve or require too much investment in inventory or financing assets. Sometimes, the overall business context requires working with such customers but such decisions must be made with eyes wide open and the trend must be followed regularly. Accountants usually provide return on capital analysis for the whole company at the end of the year. However, the modern pace of business requires a more frequent check that is broken out at least by type of customer or by product category.
Answering such questions requires integrating information from operational software – ERP, CRM, logistics (where gross profit is recorded) and accounting systems (where currency exchange, taxes, personnel, overhead costs, and assets are tracked). This difficulty is not insurmountable with the right analytical system and data integration tools.
Logistics efficiency: deliveries per route, costs per route, delivery errors, vehicles utilization, total logistics costs trends, distance and fuel consumption
The first step in assessing your logistics is to group all your logistics costs: fuel, transport taxes, maintenance, depreciation, team – all of it. It should be entered periodically by your bookkeeper and tagged separately as time-driven (taxes) and distance driven (fuel). Then start checking the trends regularly and their relationship to sales that are delivered by your company. Uncover what drives the differences from period to period. Calculate the costs for each route, then the number of deliveries and the cost per delivery and compare to the value of a delivery. Where are you falling short? Find out the average fuel cost you are paying over time, use the delivery distances to check fuel consumption trends by vehicle. Are they in line with the manufacturer specifications and with the age or maintenance record of the asset. Track the utilization of every vehicle. What is your optimal target and what was your performance last month? You are running a shipping mini-business – use the metrics that are tailored to it.
Increase inventory turns – lower working capital
An important efficiency metric is inventory turns. Basically, it compares your average investment in inventory (value of your stock) for a given product compared to the sales of this product, both computed for the same time period. Generally, the more turns per year means that you are using your capital and probably warehousing space more efficiently. There is no universal standard – it depends on the product. The most useful practice is to follow the trends over time.
Collect early, pay later – lower financing costs by watching your cash cycle. You’ve negotiated some spectacular payment terms, both with customers and suppliers. Is your business executing on them?
Last but definitely not least is the cost of your financing. Collect as early as possible and pay as late as possible. Depending on your accounting software, this is not always easy to track in detail, by customer and by supplier. As a start, you negotiate different payment terms with different vendors and customers but then life happens and things start to deviate here and there. You need a precise and timely view on which customers are dragging their feet. The earlier you take action, the lower your financial risk. Or you might decide to give a little bit of leeway, maybe in return for something else from the customer. In any case, this information is valuable for your business and should be reviewed regularly, hopefully with highlighted anomalies. Why do you have to stare at the data if the computer is perfectly capable of showing you what’s important, based on your company’s financial policies.
This can also lower your financing cost. It is never good to run to the bank for additional capital or extension on current terms. Instead, you should foresee the need in advance and act prepared – regardless of whether you want to lower or increase your debt load.
Your accounting system definitely tracks payments by invoice. However, the data might be difficult to cut by customer and to calculate trends over time. A dedicated analytics system can add tons of value to your accounting database.
Develop a useful business habit
Do these practices seem obvious to you? Well, the problem is that most business cannot cope with them. One of the main reasons is the manual work and the discipline required to generate the information. The good news is that technology changed the game, and business data has become much easier to integrate and visualize.
Importantly, don’t think you need to analyse everything. Instead, start small and focus on the areas where you suspect there are inefficiencies. Then gradually develop a habit of thinking with data. It’s about gaining knowledge from a flood of operational data and driving informed action.