Many organizations drive growth and measure and reward their sales force based on sales volume growth, measured in currency units (dollars). While this approach may grow “the top line,” being able to measure and drive product mix is necessary to grow “the bottom line.” The ability to measure the profit contribution of selling efforts is essential to rewarding the sales efforts that most support the organization’s total growth strategy.
Many enterprise resource planning (ERP) systems can capture sales in units and currency by territory and sales person. However, the ability to capture profitability by salesperson, territory, customer, or some other attribute is more complex, yet essential to making informed marketing and selling decisions. The ability of an ERP system to measure profitability depends on whether the system can capture more than just product cost information at the lowest possible level.
Most systems will capture cost at the line item level when invoiced. However, unit cost data only provides a “gross profit” picture of activity. In order to get a net profit picture, other selling costs such as promotional expense or advertising need to be applied to the product as well. Such costs are not delineated by product, which means they must be “allocated” to each product sold. The ERP system should provide allocation methods to different accounts (promotion expense, advertising expense, etc.) and allocate each differently. For instance, advertising expense might be allocated based on sales units as a percentage of total sales, while promotional expense may be identifiable to a product “family” and then allocated to the products in that family.
The actual way a company defines and utilizes profitability analysis will depend on their organizational and market structure, as well as their growth strategy. However, the ability of an ERP system to provide flexible, detailed P&L information by product is essential to growing the bottom line, as well as the top.
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