By Neil Gaskell
Neil Gaskell is the Commercial Financial Controller for Indesit Company UK Ltd. He is a CIMA qualified accountant and is responsible for commercial finance and credit management. He specialises in financial modelling in Excel and Access.
In the current climate many companies are tightening their belts and looking where to cut unnecessary overheads. Far too often the area that is overlooked is the one profit and loss line that can do more for the bottom line than any fixed cost.
A 5% increase in sales revenue will add more to the bottom line than a 5% cut in fixed costs ever will. Before proposing a blanket price increase to your sales director, a simple analysis can be done to identify areas to reduce discounting and where profitable customer behaviour is not being encouraged.
For one of your top selling products run a scatter graph with total sales revenue on the x axis at the bottom and revenue per product on the y axis. Each dot on the scatter graph should then represent a customer. In an ideal world the customers will follow a trend line and thus the more a customer buys the better price it gets. However, in the real world we know this isn’t the case. Focus your eyes on the customers that are in the bottom left of the graph that are enjoying better prices than the customers buying more volume.
The objective of this exercise is to identify the customers who are getting a better deal than a customer who buys, say twice as much. There could be many reasons for this, such as ad-hoc and excessive discounting or discounts given for an agreed potential level of business which hasn’t yet been realised.
The analysis will raise many questions and you should obtain justifications for the discounts. Identify who the sales people giving more discounts. If a sales person is allowed to give discounts within a range, identify who always gives their maximum discount allowed. This could be a sign they're too quick to discount. Alternatively, identify the salespeople who only give out the lowest discounts, maybe they’re not using the tools available to them to pro-actively incentivise the customer.
Remember, this is not a blame exercise. It’s about understanding the factors that affect the companies’ margin negatively and rectifying and creating policy to stop it going forward.
It’s important to identify the actions to be made, draw out a plan and monitor the results with a review process that is shared across all key stakeholders.
It is likely that this is the first time that such a process has been carried out in your business. If so, then no doubt there will be many action points on the plan. Pragmatism is key to the success of the plan. Don’t attempt to resolve all action points and fail to resolve even one due to spreading yourself to thin, instead tackle the most material problem in isolation. Once complete, work down the list one by one. This allows you to be more effective and show stakeholders that your analysis is bearing fruit.
Have you carried out a similar analysis? Got a question for Neil? Share your thoughts and leave your questions below.
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