The new year under way, and you’re searching for ways to improve your company’s profitability. No doubt, you have wrung costs to the minimum and continue to drive sales throughout your business . But where does your next margin opportunity lie? Where will you realize the greatest gain for your effort?
Look no further than your own invoice data (coupled with some cost data, perhaps). This data can reveal tremendous margin lift without the need for an analyst with a Ph.D. in mathematics. Some simple visualizations of the data make it easy to see the opportunities and take action. Better yet: Use an automated margin management tool to dramatically increase your speed to profit.
There are dozens of places to find margin improvement within this data; here are three to start the year off right:
Pay Attention to Sales Margin Performance
We typically hold the sales team accountable for generating top-line sales. However, looking at individual margin performance almost always reveals significant differences from sales rep to sales rep. While we realize that customer and product mixes vary across territories, an analysis of gross margins can reveal unexpected inconsistencies. Here is a simple way of visualizing margin performance.
Measure Your Price Performance EVERY Month
If you read our newsletters regularly, you know by now that nothing impacts margins more than price changes. Improvement in price performance can significantly improve margins, while degrading performance decreases margins. Measure your price performance across your entire business every month. You may be surprised at how dynamic pricing can be and its impact on financial performance. Without measuring, you have no insight into how this powerful profit driver is affecting your company. Once you begin to measure overall performance, you can dig into the changes and identify the causes. We see few companies managing price performance even though it can provide huge returns. The charts below show how price performance can be tied to margin performance.
Manage Those Margins!
Most managers believe they have a handle on their margins. Yet, many are surprised at what we find when we analyze margins at the transaction level. The chart below shows the gross margin for every line item transaction for a wholesale distribution business. While management expected to see some transactions at negative margin, they were surprised to see the number of transactions below 10% gross margin. Margins at the extreme high end, on the other hand, represent opportunities for a shift in customer or product mix.
These three areas represent the tip of the iceberg. They are merely a starting point to help you analyze and improve your margins. Additional analyses are likely to reveal many more opportunities. The key is to identify areas of potential improvement and then take action to realize those improvements. By sharing your thought process with other decision-makers in your organization, and helping your sales team understand the potential rewards of their improved performance, you will foster the development of a culture that drives toward higher profitability.
Acuity Margin Management is a cloud based management tool that provides monthly actionable insights for improving profitability. Analyses include price realization, cost, mix and volume changes along with price elasticity for sales reps, markets, product lines, SKUs and more.