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Case Studies - Key Performance Indicators

The issue

Poor systems and low gross profit margin.

"We are importers and wholesalers of over 4,000 product lines which we hold in stock and sell throughout New Zealand mainly through self-employed agents who we pay commission based on sales. Our accounting and inventory systems were in a bit of a mess as following our request for help, our accountants had sent in one of their trainees who had actually made things worse. We import goods in several different currencies and also have to cope with import and freight costs so our accounting is not straightforward.

A friend recommended Nick as someone who would come in and sort out our problems so we asked him for help. We explained to Nick that in addition to sorting out our accounting and inventory we also needed help in pricing, budgeting and most importantly of all, to boost our gross profit margins which had not increased in line with the growth of our turnover.

When Nick had sorted out our accounting and inventory issues he started looking at our gross profit margins. He told us that it was no good just looking at the overall gross profit margin, we had to drill down into this and find out why we were falling behind and that we needed to be able to produce regular reports showing how we were tracking, not just carry out the odd test analysis here and there as others do. Nick explained that the best way to do this was to customise our accounting system to analyse our margins in several areas, by different types of customer, across product categories, by supplier, by salesperson, or by individual customer if significant, and lastly by individual product line.

 

After some months of looking at the various reports which Nick produced for us in line with our GST periods, we found wide variations in profitability between our sales agents, our suppliers, customers and product categories. Working closely with Nick, we set a target gross profit margin and then looked at everything below this level. We dispensed with a couple of our sales agents, replaced 10 suppliers and stopped stocking about 250 product lines. We also focused more on the types of customer which were generating the highest margins, looking for more of the same and in addition, introduced more product lines in the most profitable product categories. Nick also pointed out that there wasn't enough difference on some of our margins between the top-end and budget lines, as customers expected to pay more for luxury items so we increased prices on our more expensive lines.

Our gross profit margins were definitely on the mend and we knew exactly how much profit we were making from month to month and all our import and freight inwards costs were now reflected in our inventory and prices. We could compare actual results against budgeted and immediately identify slow-moving inventory. And most importantly of all, after our first year of working with Nick our gross profit margin had increased by over $160,000 and we had a lot more cash in the bank."

The result

Analysing gross profit results in $160,000 increase in margins.