Case Studies

Innovative strategy

Shrink or Die
In today’s economy, many companies are faced with challenges that fundamentally change their business economics. Just as the mainframe computer industry had to redefine itself and make a transition into the world of personal computers.. Read more

 

 

Increasing Profits by Managing Costs

It is no secret that business decisions are frequently made with incomplete information. Whether this is due to a lack of time, resources, or just misguided information, the decision is made and the outcome, good or bad, is soon to follow. This cycle happens quite often in pricing. In order to compete, pricing decisions are sometimes made with haste, and as a result, a product may be set at a price that is below our anticipated profit goals. This can chip away at margins and slowly erode overall profitability for the company.

Pricing decisions are usually based on lack of complete information, because of the shear complexity of the various market forces at play. However, one thing that can be controlled, or managed to a more accurate degree, is cost. To run a profitable business, it is imperative that management has a good understanding of how costs flow through the organization, as well as how the specific costs should be allocated to the sale of products and services.

Many businesses that have a great handle on how to produce and market their product lack the detailed cost information to make critical pricing and product sourcing decisions. Usually, this doesn't stem from a lack of competence, but instead a lack of time and resources. Managers and employees are too busy handling the day-to-day tasks of running the business to take an in-depth dive into their costs. In addition, what may have previously been a one-product line business, could now be a multi-product line company, which makes tackling cost analysis and allocation far more complex.

Get Back to Basics:
The best way to truly understand which costs should be allocated to which products is by analyzing the fundamental business model of your organization. In order to identify where costs are incurred and how they are allocated to each product, you need an accurate picture of the way products are purchased, manufactured, stored, transported, and sold. Only when you have a detailed picture of the business model can you pin specific costs to an individual product.

For example in a manufacturing company, the real costs that need to be covered by each product can be grouped into 4 main categories, direct materials, direct labor, manufacturing overhead and other indirect costs. By properly allocating the costs of these categories, it will increase or decrease each product's profitability. Sometimes the best solutions to specific problems lie in the right question. For a manufacturing business, here are some topics to get your management team thinking about how to increase profits by managing costs:

Company profitability hinges on managing the profitability of each product in your business. Although there are complexities that enter in with managing the mix for multiple products – profitability, company-wide begins with knowing your costs and properly allocating them to each product in your mix. Know your costs, study the market dynamics and price your sales for profitability.

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