Aging AR also hid eroding Margins

Challenge

A Wholesale Distributor and Importer brought us in to get a clearer picture of their Product Margins — to measure their "actuals," not just planned margins.

Although they knew some customer accounts were paying slower, the brisk inventory turnover had always meant business was healthy. Nevertheless, cash was drying up.

Approach

We needed to better link freight, duties and currency changes to Product Costs so we built Landed Cost tracking, showing what each SKU cost once it was in their warehouse.

While AR Aging was used to refocus sales efforts, we improved Inventory cycle counting, tracking and controls.

Outcome

Small cost increases, spread across different lines of the Profit and Loss statement, were not significant enough on their own to justify customer price increases. For example, Euro based unit costs didn't go up but the cost in dollars did, as did many other duties and fees.

Landed Cost enabled tracking true, changing Product Level Margins. This in turn enabled Account level margin tracking as well.

By tracking Account level margins on a Cash Basis (Net Realized Contribution Margin) our client was able to limit exposure to some customers and refocus on the most truly profitable ones instead.

What we learned

Incomplete cost of goods can hide negative changes to your profit margins and cash. Tracking Product Margins and Contribution Margins provides a much clearer picture of business health than just top-line sales.