WHY SALES EXCEPTION REPORTING can pay for itself! (Part 1)

Following up on last week’s blog, ‘What is my real Net Cost’, I wanted to discuss how Sales Exception Reports can be utilized not just for analysis, but to catch what could be substantial billing errors.  (See example spreadsheet below.)

While many Controllers sift through stacks of reports, how many can find Selling Price errors that, if corrected, could stem further losses.  During my career with a publicly held company we were so fortunate to have some very smart people, programmers and developers, who understood accounting and the needs of the Sales Division.  One of the very best sales management tools they developed was a report issued weekly that looked at product sales, by invoice line (remember, as discussed in the previous post, you must be engaged in transactional posting).  It then compared the unit selling price to the unit cost of sales.  Further it generated a column for Gross Margin Dollars and Gross Margin Percent.  Remember, there is some setup work for a report like this but it is based on simple queries that most programmers could easily create to generate this report.

Let’s look at a a couple of simple  examples:

Example 1:  We have a new product……………Mops.  We paid $3.97 for the mops and sold them for $4.50 with a Gross Margin Percent of 11.78%.  Does that meet the company’s expectations of profit for that product?  The Sales Department should know the answer to that question.  But the question needs to be asked.

Example 2:  The Sales Department was successful in promoting sales of pails this month.  They were budgeted to sell 115 and sold 129.  However, much to the Sales Department’s dismay they actually lost money on the sales.  The Sales Exception Report tells them that they purchased the pails for $2.01 each and sold them for $1.75.  The scenarios leading to lost profits can be many.  Here are some of them:

  • The Selling Price is incorrect.  Someone incorrectly keyed it into the system
  • The Cost is wrong.  It’s possible that the P.O. for the pails showed $1.01 and the Vendor charged $2.01 (we all know that happens)
  • Freight cost was not considered.  Freight is one of the most confusing concepts within a lot of inventory and accounts payable groups.  FOB, Prepaid, Freight Allowance, etc.  If your P.O.’s don’t properly record the freight cost, if any, it will lead to costing errors.

Properly designed, the Sales Exception Report can lead to some serious cost savings.  When I recommended using the report to the owner of my company (a large privately held enterprise) he invested in having the report designed for him.  His comment, ‘it almost paid for itself in one day’.

Some of you may have access to these reports.  But what makes an ‘Exception’ Report?  Many of you may have seen Invoice Registers during your career.  The reports came in and there might be 500 invoices to pour through to see if everything looks right. (What if there were 1,000 invoices to review?) Then we moved into the era of ‘Management by Exception’.  Instead of looking at the good and the bad, let’s just look at the bad.  Who decides what’s bad?  You do.  Your Sales group does.  Owners and Executives will.

So, take a look at my simple example created in Excel.  As previously stated, the Sales Exception Report probably should be generated through a set of queries reduced to a well designed report.  It is not meant for Excel.  It really is part of your data analytics management.  Thing Big!

Next week, we will discuss setting criteria for your report.  No criteria and the report becomes an Invoice Register once again.

https://onedrive.live.com/redir?page=view&resid=2962BCBB16FDD425!1662&authkey=!AFsGbYilU2AGMOc

The Mystery of ‘WHAT IS MY REAL NET COST’ and how to solve it….

Image result for product costing template

 

I am a member of the Linked In group ‘FSN’.  It is comprised of accounting and finance professionals from all over the world.  How amazing that a Controller in South Africa may be struggling with the same problems a controller in Georgia struggles with.

So, let’s talk about one of the most challenging topics of all.  ‘What is my real true cost of product ‘x’?’ There have been thousands of pages, posts, classes, books written on costing.   Job costing software is challenging but if not set up properly is a waste of time and money.

Don’t forget that the true cost of the products and services you sell must be defined in order for selling decisions to be made, especially in industries with very fluid markets.  Cost really matters. Many of these industries sell commodities like food, where the market moves several times a day.  Knowing the real cost is critical to measuring profits.  The question is HOW DO WE ARRIVE AT THAT NUMBER? How would I?

  1. Remember, accounting is as much art as it is science.  If it wasn’t we wouldn’t be arguing as much as we do on how to get to the correct numbers.  There are many and varied philosophies about the proper method of cost accounting.
  2. Legacy systems and costing methods may be outdated, especially if you inherited it.  If you did not develop the system, you need to understand how costs are applied.  Perform your own due diligence on the cost system and methods.
  3. Form a ‘Cost Advisory’ group which includes your staff accountant(s) and managers from the production side and put them to work exploring whether costs make sense.  The advisory group must become experts on cost.  Have them review Monthly Costing reports to be sure the costs make sense.  Next week’s topic will be ‘Sales Exception Reporting’ .  With Sales Exception reports you can isolate where products were sold for less than their cost or whatever criteria you designate (less than 0% Gross Margin, etc).
  4. Do you have the option for Transactional Posting?  Some companies do not post by transaction.  But transactional posting is the life blood of cost analysis.  Without it, you are looking into a barrel of costs, none identifiable.
  5. Consistency is the key to meaningful cost reporting.  Maybe I should have put this as #1 but if your cost methods apply freight cost inconsistently you have a really big problem.  (I am referring to inbound freight). For example, companies that own their own trucks might not apply freight cost to product their trucks deliver to their inventory point.  The only freight added is when a third party carrier is paid.  I run into this from time to time and I can assure you, this is the wrong method.
  6. You must get into agreement with management on what costs will form the building blocks of your net cost by product.  Generally speaking, it is the indirect costs of overhead that are the sticking point.
  7. Finally, make sure you confer with your outside accounting firm and involve them in these conversations prior to making any major changes.

My recommendations to you are based on how I would approach a consulting project with a client who needs help determining his real costs.  Inspect the template I imaged for this post to further understand the vital need to know your cost.  And remember, “one man’s true cost can be another man’s garbage”.

 

 

 

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