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Margin Analysis & Reporting: Back to Basics

Have you ever set out to determine margins on a product or service only to conclude that the correct working model is so overly complex and dependent on shifting data that achieving a fully accurate model is either impossible or so daunting you don’t know where to begin?

If so, don’t sweat it. Margin analysis can be broken down into smaller steps that are beneficial and that may eventually take you down the path to a full working model.

I once worked for an organization with a large volume of services that were being resold. The underlying cost of goods sold were all purchased at non-standardized rates because disparate vendors had to be used to service the customer’s varied locations across the country. The location often dictated which type of underlying service was utilized. Some of the services would have only a direct cost component while others would have indirect costs that needed to be factored in.

We held many conference calls to first assess all the indirect costs and then determine the best methodology to use to accurately calculate those indirect costs. When an acceptable solution was selected, it took time for us to realize we weren’t even in a position to correctly capture the data necessary to complete the calculations.

In the meantime, we implemented an interim solution that only evaluated direct costs. In a resale environment, that turned out to be very important. We were given insight into costly flaws in processes and procedures. We built and disseminated templates and checklists and fine-tuned workflows. We were able to implement cross-checks as a means to monitor expected results. We learned the necessity of clear and constant communication inter-departmentally. Perhaps most importantly, we all learned the importance of accountability. We were all a sum of the parts and if our whole organization was to operate effectively, it was dependent on each person in each department to complete their work accurately and in a timely manner.

By the time I left that organization, we still had not reached the point where we had a full and comprehensive margin analysis model in place. However, we had made great strides in comparison to where we had started.

What I learned from that situation is not to overcomplicate matters to the point that you become immobile. Implementing some form of margin reporting is more beneficial than having nothing at all. You may find that your first steps are the most productive steps. Even if your first working model is fairly basic as opposed to exhaustive, patterns and problems can be identified in the short term to help you reap immediate cost savings. As you start getting familiar with your data, you will be able to flush out issues that may mask or distract from deeper issues that are more embedded and not easily uprooted. As you work with your data on a regular basis, you will gain a stronger foothold and will be better poised to tweak things to build a better model in the long term. Beginning with a basic margin analysis model doesn’t show weakness or incompetence, but rather, it helps to build a stronger foundation for your final product.