Aging AR also hid eroding Margins

Challenge

A wine importer selling wholesale couldn't say which wines or which accounts were making money. Freight, duties and currency movement were booked as general overhead, so every product margin looked better than it was.

The cash side was worse. Duty and freight are paid when goods land, months before a wholesale account pays for them, and some accounts paid slowly. The reports said healthy margins; the bank balance kept tightening.

Approach

We reorganized the books so costs attached to the products that caused them, and margin could be read at two levels: by product, with the full landed cost included, and by account, after that account's terms, with receivables aging beside it.

Outcome

For the first time the importer could see what each wine earned once it was actually in the country, and what each account was worth once its terms and its payment speed were counted. Accounts with strong revenue and slow payment stopped looking like the best customers.

Sampling and tastings, until then an article of faith, could be set against what the accounts they targeted returned.

What we learned

Incomplete cost of goods and aging receivables hide the same cash problem from two sides. An account that buys on deep terms and pays late is worth less than its revenue suggests, and a margin report that ignores landed cost will never show it.