Cost & Profitability analysis is within Enterprise Performance Management front and center. The information can be used for many purposes. Some of the more common ones include the following.
Cost of Products and Services
Understanding your cost base, your cost structure, the cost of your products and/or services is key, whether your strategic direction is focused on cost competitiveness or not. Especially for companies with relatively high fixed cost it is important to know which products or services consume these fixed cost. And it doesn’t matter if you sell products externally or internally, see also transfer pricing for an international setting. The cost information can be used as the basis for pricing but also for ad-hoc/spot pricing when you know your incremental cost.
Cost to Serve
When you are a service provider it is sometimes hard to know the cost to serve your clients. So when for instance you segment you customers in different service levels it is important to track the different cost for each service level.
Gross Margin, Interest Result, Contribution Margin versus Net Margin
And when you are in a business of relatively high cost of goods sold it sometimes feels like you know the profitability. This is especially the case when you are in the manufacturing, retail, wholesale or financial services business where you call it cost of goods sold and gross margin or you call it cost of capital and interest result or you call it claims and contribution margin. But nothing is further from the true. The Gross Margin, Interest Result, Contribution Margin is just the start of the profitability analysis.
Whale curve, Profit Cliff and Segmentation of Products and Customers
Many companies do not know which customers make up their top-10 list when it comes to bottom line contribution. The same applies for the top-10 products. Or even more interesting would be to know your bleeders. Therefore it is important to do such analysis and based on the outcomes you can define action plans for you product and account managers. It is easy to fall of the (profit) cliff if you do not know which products and customers are loss making.
Zero and Driver Based Budgeting
Budgets that are the result of estimated volumes are always more realistic than top-down budgets. Start your budget with nothing (=zero) en justify every time what resources (=budget) you need to deliver a certain outcome volume. The budget will be the result of the volume of cost drivers. You can of course correct the result for changes in cost level eg. salary increase in order to get to the most accurate budget.
(Rolling) Forecasts and Actuals
Less common and popular in Europe than in North America are rolling forecasts and rolling actuals. If you have setup your EPM in such a way that you can update the numbers every month then you should be able to report rolling actuals and rolling forecast numbers. The advantage of this methodology is that you can analyze trends in the moving average.