In economically challenging times, it's no surprise that more companies are looking to recover lost profits. What is surprising, however, is how few companies are able to grasp where their profits are won and lost. Typically, a company's customers, orders, and products that rank within the top 20% in terms of profitability account for 200% of their overall profits. The bottom 20% of the business loses the company back down to 100% of profits. Stemming these losses can have a dramatic impact on profits, over and above what could be achieved by increasing revenue alone. Doing so, however, requires the development of an effective cost management system. To illustrate the impact a costing system can have, let's look at a hypothetical company with revenues of $3 billion and a profit margin of 2.67% for a net operating profit of $80 million. This company's least profitable 20% of customers and orders are losing them $80 million in profits, one half of their profits. Recovering just 5% of lost net operating profits adds $4 million, or 5%, to the bottom line and has the potential to increase this publicly traded company's market capitalization by over $100 million. Adding $4 million to the bottom line at a 2.67% margin is equivalent to adding $150 million in revenue.
So why don't more companies with costing systems routinely increase profits by 5 or 10 percent by turning around their least profitable customers, products and suppliers?