Does this question sound strange, it is a question that every business should ask itself. About 85% of the companies globally review & analyze profitability at the end of the year or quarter through their Profit & Loss statement, making it an act of postmortem rather be regular & preventive.  Profitability is one of the key indicators of any company’s financial health & needs to be analyzed frequently, any variance needs to be understood & corrective actions have to be immediate.

 

Having said the above, the next big question is, can profitability be checked frequently and can the practice be sustainable?

 

The answer is a big yes. Profitability can be checked whenever a business generates an invoice and it cannot get any more frequent than this. Your invoice has the agreed selling price which your customers will pay you and have come to a point of invoicing your business should know the cost price of the products or services you sell, and subtract them to see the profitability. The accuracy of the profitability depends on how comprehensively is your cost price built which is expected to include the cost of purchase, manufacturing, labor, wastage, and all those expenses incurred in delivering your products or services.

 

Doing the above manually might not sound practical & sustainable, but your ERP can do it easily, talk to your ERP consultant or implementation partner to know more.

1. If you are a product based company make sure that you enable your ERP to calculate moving average cost of your stocks. This will make sure that your material purchase cost is not only accounted but also averaged with your inventory.

2. Enable your work order or job order module, to capture all the input cost & quantity, like materials, Labour, machine, services hired etc and compute the unit price of the output material or services. This action ensures that job order calculates the cost price of the product or services you sell.

3. Enable your Invoicing module to fetch the cost price calculated by Job order and have them compared to the selling price in the invoice to know the profitability. Run a few manual checks to see if the ERP calculations are correct.

 

Once you achieve the above the next action is to make sure that your business sustains the above practice & performs it consistently, this might be a standard feature in your ERP or it might need a customization, which is worth doing. Enable your ERP’s invoicing module to lock down and ask for approval if the profitability goes below the desired level set by the management. Every invoice which is compromised on profitability needs to be analyzed and the root cause should be fixed to avoid future occurrences.

 

 

Thanks for reading this content, please do let us know if you have any further clarification on the subject topic & we will be more than happy to help you out. My name is Raman & I head the Sales & Presales function at Emerging Alliance which helps companies to run better using enterprise software like SAP. You can contact us at enquiry@group-ea.com