|
 Home
Company
Acorn Blog
Five Myths Standing Between You and Improved Profitability in 2009
 |
|
Five Myths Standing Between You and Improved Profitability in 2009
Author:
Steve Anderson
5/3/2009
In our last blog, we discussed companies’ needs for greater transparency into what is driving cost and profit. The current economy has taken away the revenue lever and brought with it an urgent need to improve internal efficiencies. Given the situation many companies find themselves in, intelligent cost cutting must be done quickly.
The response to this blog could be summarized in one word: predictable. Many companies claim to already be profit focused and to have the systems in place to accurately provide timely, actionable analysis for their enterprise. That is exactly what we have heard over the last twelve years from hundreds of clients and prospects. The reality that we typically encounter is that profit focus is not universal across the organization, and that the information being generated to make business decisions was inadequate for a variety of reasons.
Here are some common misconceptions and myths that can derail companies’ efforts to improve profitability.
1. Companies are already focused on profitability and their current ERP and reporting systems already provide accurate cost and profit information. Not true. Analyst firm IDC’s “Profitability Study 2008” reveals:
• 24% of respondents want profitability reports produced more frequently
• 34% of respondents want more accurate profitability information
• 39% of respondents want to reduce the manual workload required to create profitability #’s
In a 2003 study by Ernst & Young of finance professionals, 98% reported that the cost information they provide is inaccurate.
2. Traditional Activity-Based Costing (ABC) and cost rates are all that we need.
That may be true if the scope is for a single department, or if analysis is done infrequently. It is not true for a larger model. The problem with traditional ABC is that it is extremely time-consuming to implement across an organization with hundreds of departments. It entails thousands of monthly surveys. And the rate method is flawed because rates become outdated once they are calculated (the numerator and denominator are in constant flux). This results in a model that will never reconcile with actual financials.
Of course we are biased towards the new time-driven activity-based costing methodology in part because it is superior (e.g., easy to implement and maintain, more accurate), and in part because we invented it.
3. All revenue is good revenue. Our largest clients are best because they pay more of our fixed costs.
Wrong. Typically, a company's customers, orders, and products that rank within the top 20% in terms of net profitability account for 200% of overall profits. 60% break even from a net profit perspective, and the bottom 20% bring the company back down to 100% of net profits. In our experience, the losers are not always smaller customers! If a company takes the time to accurately measure and assign costs (direct and indirect), a new picture emerges. Large volume customers are able to demand ‘special considerations’ – such as supply chain costs, special payment terms, inventory carrying costs, special funding and promotional incentives. The result: your biggest customers are not always your most profitable.
4. Improving profitability is easy: just raise prices or sell more
Wrong again. Raising prices in a recession is very difficult to do. In addition, the payback from larger revenue is not as impactful as cost reduction. Let’s illustrate: for a $10B revenue company with a 5% net profit margin, a 25% recovery of its unprofitable business is equivalent to an additional $2.5B in revenue growth or $0.63 impact on EPS (assuming 200 million shares outstanding). The moral of the story – focus on fixing the unprofitable portions of your business you can control, not the challenges of impeded revenue growth at this time.
5. Implementing an enterprise-wide costing system takes months if not years to accomplish and they are very difficult and expensive to maintain. Large, complex companies have implemented a single enterprise-wide, holistic model of their company’s operational performance, including cost, profit, revenue and capacity analysis, in less than 90 days. These include companies with hundreds of thousands or millions of customers, products, transactions, etc. It can be done without having to sacrifice accuracy. These models should reflect how the business operates!
Tags:
intelligent cost cutting, improve profit
|
|
|
|