Tracking the revenue, cost and margins products and services is a crucial practice for any business committed to good management. For companies that have a wide range of products and services, and many SKUs (stock keeping units), the ability to track key economic information is paramount.
Management’s job in these high variety / large SKU volume environments is to optimize the amount of energy spent on the products and services that generate the greatest return. One important capacity is to track the gross profit of each sale at the order line item level. When we say line item, we mean for each unique SKU (product) sold, for that customer transaction, understand the revenue, cost, and gross margin. Once you have information at this level, your ability to analyze product / service mix is pretty trivial.
However, it’s not as easy as it sounds. Beyond purchase price, the ability to track costs is complicated because all kinds of other charges that should be allocated to the each SKU. Cost may include inbound freight charges, import taxes, duties, insurance, assembly labor, storage charges, etc. Ideally, all of these costs that may be assessed to a large batch of goods should be allocated to each unique unit.
On the revenue side, the assumption is that the price is simply the amount we sold it to the customer. But there are often promotions, discounts, bundles, kits and other deals that may get accounted for at the order level, but not at the order line item level. Do you discount the item level price to account for special incentives? If so, what are the rules?
NetSuite has the capacity to track this information. Out-of-the-box, gross profit is provided as a simple formula. But the process is tricky when there are other types of promotions and charges to account for. This is where expert NetSuite advice can make a difference. For example, special scripts can be developed that will look at promotions and apply costs or prices at the item level. Alternative price and cost buckets can be created to drive “derived” (calculated) order item level gross margin. The ability to extend the NetSuite platform to track this information is where much of its power lies — especially if you understand the business challenge and you know how to adapt the tool to meet the requirements.
NetSuite’s built-in reporting tools work well when the data is prepped. Assuming we did our work calculating price, cost and gross margin at the order line item level, we can rank sold items based on dollar volume, or margin percentage. We can link the item to categories and roll up transactions to look economics a different level. We can link the transactions to customer type or sales channel and consider margin there. Add a time dimension and the trend can tell you changes in the marketplace. This capacity provides the opportunity for management to develop key insights about which products should be retired and which products should be more heavily promoted. A NetSuite expert can help make sure every transaction accounts for all the necessary elements to see gross margin — and this may lead to greater competitive advantages as many companies can not produce this important metric.
Copyright © Marty Zigman 2011
Marty Zigman
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
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