Collinson Grant

Profitability

What we do

Nearly every company struggles to build an accurate picture of the profitability of each of its products or services. It is only when disaster is imminent that managers start to appreciate that some of their 'favourite' (usually best-selling) lines have been losing money, possibly for years. Marginal costing, and worse, marginal pricing, can quickly lead to an unsustainable business.

Because the mix of products, customers and activities changes, it is not uncommon to find that overheads have risen substantially as a proportion of total costs. Merely allocating overheads on the basis of direct cost, or even worse, sales values, results in the under-costing, and probably under-pricing, of the more complex products that require operational, customer service or sales support.

How we do it

Collinson Grant uses different tools to help managers regain control:

activity-based costing - allows managers to gain a new and different perspective on the activities, products and customers for which they are accountable. The results can lead to dramatic reorganisation of product ranges, customer groupings and facilities.
database analysis (the 'cube') - an economical and powerful approach is to create a database of core performance data - usually described as the 'CUBE' - that can be interrogated by managers to improve their day-to-day decisions. Reports can be built to fulfil the specific needs of each situation - comparing and contrasting data from many different perspectives, analysing and reporting them graphically to help communicate trends and relationships. The results provide an authoritative basis for challenging managers’ instincts and prejudices and for supporting difficult decisions.
value-chain accounting - supply chains are now usually quite complex, incorporating internal processes within the business and the provision of supplies and services from outside. As a product is passed from one department or function to another, it incurs costs and should gain value. It is this balance between costs and value at each stage that needs to be monitored. An integrated information system may be needed to manage the changes. Value chain accounting ensures that control points are clarified and that managerial action is focused on those elements of the internal or external supply chain that have the most potential for raising profitability.

Our experience

Analysing the profitability of products, services and customers is a common element of our work. It is often the starting point for a more fundamental restructuring of a business and a return to acceptable profitability. The tools that we use can be applied in a wide variety of sectors, in large businesses and in smaller operating units.