This is by far the powerful tool in your financial tool box. Using conventional accounting methods will provide you with gross margins, which leads to profitability, but without the ability to identify the highest margin products and/or services or customers. Also it calibrates your break even point with far greater accuracy.
Given a contracting economy with diminishing business opportunities and inflation devaluing the currency, create a new "TO BE" process and use it to establish best practices for each process and achieve Lowest Cost Producer in your market.
EPISODE 61: Summary
In order for a process to generate a good margin and contribute to profitability, all costs need to be identified and assigned to the correct step. This is required to identify a product or service's full cost, variable and fixed, and embed into each step of the process. There is no other way except guessing to answer the most fundamental question - does the output of this process, whether it is a product or service, have sufficient margin to make it profitable?
EPISODE 62: Value Mapping - Improve First
This starts with creating value maps for each major process that produces something to sell. As we discussed in previous shows, once you have reviewed and improved the process to take all unnecessary steps of the process, now is to time fully burden each step with all of its costs.
EPISODE 63: Create Cost Pools
This usually involves three areas for variable costs - materials, labor, and margin. Next, determine how much fixed cost to assign to each step. The simplest is to use time - how long will the step take and what percentage of overheads costs should be assigned. You will never get it exact but will be amazed when you compute all the costs and look at the price - how much margin are you really making?
EPISODE 64: ABC and Break Even
You have now reached the magic of this method and your ROI. The first cut of BE (break even) was in the aggregate - looking at everything. This will work as long as you sell one product or service but if you have several offers or lines (products and/or services). If your offer is more complicated you need to look at each line starting with individual products and/or services. This analysis will provide you with an accurate picture of how to sell in each area or abandon it.
Next Show/Chapter 17: Cash Flow Cycle
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