Profitability and gross margin information is vitally important to sound business decision making and effectively competing in your market space. Modern business software (ERP software) is invaluable in collecting data across the enterprise and presenting it in a form that allows timely and accurate decisions. Without technology, collecting, computing, and presenting this information would be a daunting, if not an impossible task.
There are many forms of profitability analysis that ERP systems can calculate and present. The major functional areas include:
- Overall business profitability (Profit and Loss Statements)
- Customer profitability
- Product and product line profitability
- Customer by product
- Sales Order profit
- Job or Project profitability
On the surface, computing profitability might not seem difficult until you explore the elements included in the calculation. Let’s take customer profitability as an example. There are many components that can be included or excluded in the customer profitability calculation. In addition to selling price less the product cost for all items the customer purchased, we need to consider: returns, sales commissions, promotional allowances, advertising allowances, slotting fees, discounts, packaging, labeling, shipping, and handling. Without including all of the important elements in the analysis, you don’t have a true profitability picture, which makes decision making a much more difficult task.
Many businesses do not have an accurate picture of profitability. This limits their ability to make informed decisions and, in some circumstances, creates a significant competitive disadvantage. I recently worked with a 100 year old manufacturing company in New Jersey that could only estimate their product costs with an accuracy of +/- 30%. Their antiquated ERP software could not capture all of the raw material and production costs, so all they could do was estimate the cost. Unfortunately, they were losing market share to a major competitor who was selling at a lower price point. With 3,300 products and no accurate costing information, the company was severely handicapped in creating a competitive response.
In today’s business environment companies must be agile and react quickly to competition, fluctuating product and material costs, regulatory, and compliance requirements. Agility requires timely and accurate information. Today’s ERP software solutions, if used properly, are designed to provide the information executives require to navigate the waters to optimum profitability.
Technology is only one of three critical pillars in the successful implementation of ERP systems. Equally important are People and Business Processes. It takes the right people with a positive attitude who are adequately trained to make full use of the technology. Business Processes are where companies frequently fall short. Taking old business processes and applying them to new technology most often achieves a disappointing result. As new technology is implemented, existing processes must be examined, challenged, and redesigned to truly leverage the benefit and value the technology can provide. Just like an annual medical exam or business audit, agile and well managed companies need to do a business process and technology review to optimize the value and return on their ERP investment.