A large part of my work involves providing management with information allowing them to make strategic decisions.
I will provide a case study here which shows the benefit of that information:
One of my clients runs a distribution business supplying cleaning equipment, When I first arrived at this client her revenues were declining and profit margins were being squeezed to the point that the business was hemorrhaging cash at a frightening rate. Basically if something wasnt done quickly she would be out of business in two months.
The obvious starting points were for me to negotiate hard with suppliers on her behalf to reduce the cost of goods sold. Often I have a distinct advantage with this as an outsider. It can be hard to lean on suppliers for discounts if you’ve built up a friendship with them. Once margins were improved by reducing costs, I tackled overheads and again reduced them to the bone.
At this point I examined her sales ledger. There was a vast amount of customers but a lot of them weren’t buying very much. To analyse the sales in greater detail I exported her entire sales and purchases ledger into a spreadsheet and manipulated the data using pivot tables. The glaringly obvious problem was the tiny gross profit being made on some of the sales calls.
Next step was to analyise the drivers routes. To do this I entered their entire routes into Google maps and calculated the mileage between each call.
The final table was a ratio of gross profit per call cross referenced with the mileage to get to the call. This gave a very basic P&L per call. From this table it was extremely obvious that the company was suffering vast losses by servicing certain customers when fuel and sales persons time were factored into the equation.
Fixing this wasn’t too difficult first step : Contact the customer and discuss the issue. Basically the goal of this call is to increase the customers value per order. If this means delivering once every two months instead of once a month then so be it. Eventually after negotiating improved terms with some customers and deciding not to service others, we were left with a sales person too many. A quick chat with the sales people and one was willing to take voluntary redundancy. (your not always that lucky!!)
The key point is analyise your customers individually and create a P&L for each one. If the customer isn’t contributing enough try to develop them. If they can’t be developed dump them. Remember Develop or Dump!
As always if you need any information please do not hesitate to contact me:
This is the Blog of an Accountant based in Galway providing Bookkeeping services and accountancy software