Financial Planning & Analysis

4 Steps to Stronger Customer Profitability Analysis

Discover who is truly contributing to the growth of your business.

Every business needs customers. Customers are the reason for walking into the office (or jumping on a Zoom call, nowadays). Without them, it’s impossible to generate revenue, so it’s safe to assume that the more customers you have the better, right?…

Not necessarily.

Success in business is about optimizing and maximizing everything. Efficiency leads to productivity, and productivity improves the bottom line. Customers are necessary, however, identifying the differences between the right and the wrong (or less-than-right) customers will make you more profitable in the long run. That’s why it’s important to continuously evaluate each customer’s performance.

Are you 100% certain that every customer is contributing to bottom-line growth?

Sales and marketing departments commonly evaluate their performance using market share, company sales share, product mix and margin contribution – but this fails to paint the complete picture. What is frequently ignored are the overhead costs that directly impact profitability and must be allocated. A common cause resides within the reporting provided by the accounting and finance department. Customer reporting from an ERP system often ends at the margin line.

By creating a customer financial profile, which includes product mix, selling expenses and an overhead allocation, you can build out a full profit and loss statement on a per customer basis. With this new perspective, you will come to realize one very important fact:

There are right customers and less-than-right customers.

Even the largest top-line contributor can be detrimental to the bottom line. Reviewing each customer (or customer segment) in detail with the management team will help you make important decisions on how to increase profitability at the customer level. This analysis will become an important part of your customer acquisition process.

4 Easy Steps for Finding the Right Customers in Your Customer Profitability Analysis

  1. Gather your product mix by customer to determine margin contribution.
  2. Ensure you understand the discounts that each customer may be given that erode margin.
  3. Determine your overhead allocation.

Let’s pause for an important note here. You can determine overhead allocation by overall sales contribution; however, it often pays to go granular. Take the extra time to learn how much it costs per product to distribute, how the customer’s location affects shipping cost and distribution facilities. Deeper analysis like this helps shine a light on less-than-right customers.

And finally,

  1. Prepare a profit and loss statement by customer to discover their actual contribution to profitability.

Let us help

A customer profitability analysis is easy to understand but more complicated to perform. It can be an extremely detailed and complex process. Data can be difficult to gather, and when synthesizing the data and creating the profitability contribution, people lose sight of the profitability of the entire business. Good news is we can help. Contact us to learn more.

If you’d like to learn more about these types of services, download our service sheet below:

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