IntoTheMinds carries out profitability analysis using the ABC (Activity-Based Costing) method in whole Europe. Profitability studies are essential to identify your most profitable customers, the ones you need to retain at all costs. The same technique can also be applied to your products or services to determine which ones to promote and which ones to stop. By removing a product from its range of products, for example, one of our customers has earned several net margin points, resulting in thousands of euros in additional profits.
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Why do a profitability analysis?
Your accountant can provide you with information on many aspects of your business. But it will be difficult for him to tell you which of your customers are generating profits and which are costing you money. Some of your products are also more cost-effective than others, but traditional analytical methods do not allow you to detect them.
We apply the ABC (Activity-Based Costing) method to determine where your profits come from. And in 100% of the cases, we have analysed, the origin of the profits is not correlated to the source of the turnover.
Knowing the origin of your profits will allow you to improve your results by, for example, correcting your customers’ contribution to earnings on a case-by-case basis. Don’t be afraid to get rid of customers who drain your profits!
The ABC method makes it possible to make a realistic allocation of indirect costs on your various products/services and customers. The division created by many companies between direct and indirect charges rarely corresponds to reality, and some products become artificially profitable when, in fact, they make the company lose money. A similar analysis can be performed to identify the least profitable customers.
When to do a profitability analysis?
The factors that determine the need for a profitability assessment are:
- Your financial situation: if it deteriorates, it is urgent to know why and to capitalise on the products and customers that bring you the most profit. Remember that customer loyalty is the best way to increase your margin and profits.
- Redesign of your marketing strategy: if you have to rethink your marketing strategy, it is also necessary to consider the products and services to be offered on the one hand and the customer segments on which to capitalise.
- Sale of your company: have you decided to sell your company? A few additional margin points can represent different consequences in terms of resale value. Profitability analysis is the best way to maximise your profits.
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Of course, specific strategic and market penetration considerations can make a product or service temporarily unprofitable. We integrate this aspect into our analyses. That being said, in 100% of the cases we have handled, we have uncovered situations that are more or less surprising for our clients, which are corrected to immediately increase the company’s profitability. One of our clients has seen its profitability triple between one tax year and the other.
When we apply the ABC Costing method, we do not only analyse the employees’ time allocation. We also study, for example, how products or services are produced, the tools used (machines or other) and their depreciation, the customer acquisition costs according to the different distribution channels, the Customer Lifetime Value of the different market segments.
These complex analyses are strictly objective because they are carried out in parallel by two independent consultants. Also, our clients are involved in every stage of the review, which further enhances the credibility of our conclusions.
Believe it or not. All your customers, all your products, all your services are not profitable. You are losing money with some of them, and appropriate corrections would allow you to improve your results.
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