Learn how to Reliably Measure NetSuite Gross Profit and Margin

This article is relevant if you need to produce consistent gross profit or gross margin analysis within your NetSuite based business operations.

Background

A number of my clients use gross profit and margin to analyze their business operations.  The simple definition of gross profit is derived by a company’s total sales revenue minus its cost of goods sold (COGS); gross margin is the same number divided by total sales revenue, expressed as a percentage.

When I enter these conversations, I usually need to clarify the purpose and determine the meaning of gross profit or margin in their minds.  The conversation usually involves asking some important questions:

  1. Level: are we going to measure profit based on item, sales order, project, customer, sales channel, or subsidiary (company)?
  2. Discounts: how are sales and purchase discounts factored into gross profit or margin?
  3. Drop Ship Items: Are you using non-inventory drop ship or special order items in your flows?
  4. Landed Costs: Are there other costs that need to be capitalized into inventory so that these are considered in your margin analysis?
  5. Other Costs: Do you have other costs that are independent from the originating sales order that must be included?
  6. Item Kits: Do you use NetSuite kits to drive your bundled based sales?

Ultimately, once we get centered on the definition of what drives gross margin in my client’s mind, we can address the challenges they face in its measurement. For example, a client may be using gross margin to calculate out their commission obligation. Generally, NetSuite commissions based on gross margin is tricky because of the nature of what may need to go into information gathering to produce the calculation. If the systems are not set up right, a number of external spreadsheet systems are maintained to overcome weaknesses in the NetSuite implementation model.  You may want to review my article, NetSuite Driven Commissions – Your Way.

Working with NetSuite Gross Profit / Margin Considerations

NetSuite offers a Gross Profit Estimate feature designed to help organizations assess gross margin during the sales cycle. It’s important to understand that this feature does not measure actual — but instead allows you to get some control over the expected input costs for a specific sales transaction.  I like the feature to help plan a sales order especially if we want to have some minimum control over expected margin.  As I discussed in Learn How to Build Scalable NetSuite Sales Order Practices, it may be important to confirm that sales orders each meet margin requirements before they are released for fulfillment — those orders that fall below a specific threshold may demand intervention if producing a delivery will hurt profitability.  The Gross Profit Estimate feature can help steer order-by-order decision making.

Steer in NetSuite Profit over the Transaction Lifecycle

For one client in a complex drop ship business operation, we invented a mechanism to view gross margin at three levels:

  1. Estimated: outside type salesperson originates the sales process using NetSuite estimates (quotes).  At the time the Estimate becomes a Sales Order, we captured the estimated gross margin and held it for comparative purposes. This measurement becomes our “going in” margin estimate.
  2. Planned: Sales orders are then processed by project managers who understand supplier product options and they work to get better purchase prices while making sure that each sales order will meet fulfillment criteria.  The sales order thus becomes the planned gross profit and we could then compare the project manager performance against estimated.  Thus, we could incrementally see the value the project manager brought to the process.
  3. Actual: finally, after a sales order was completely fulfilled, we had a chance to measure our actual margin.  These values were measured based on financial transactions which included invoices, credit memos, item receipts, item fulfillments and other charges that we could identify, such as independent freight bills.  We had to invent a non-standard project capacity to act as a thread to gather up costs that were not part of the original sales order but which could be identified so we could make an an accurate gross margin assessment.

These three distinctions allowed management to measure the performance from different business actors and thus refine policies and practices to produce less variability and more meaning in the real day-to-day operations.

Addressing NetSuite Gross Profit Input Concerns

Once you are centered on why you want to measure NetSuite gross profit / gross margin, you can begin to develop an attack plan to reliably measure it.  Respectfully, when I listen to prospective clients, I need to be careful to hear the nuances in their business model.  Nonetheless, I can share some thinking around some patterns that I commonly see:

  1. Level: Sometimes, we can measure gross margin correctly at the subsidiary level, or perhaps the customer level, but we can’t get to good numbers at the item or project level.  Solving these concerns means that we must model the way we are capturing information so that we can reliably track profit or margin.  For example, we may find that we want to see information based on Sales Channel but we don’t have the costs side of our transaction flowing properly to record information — thus we can’t solve this until we reconfigure our transaction model.
  2. Discounts: we need to confirm the approach used on how sales discounts are set up: posting versus non-posting.  I like how NetSuite can connect item discounts from the gross sales price using saved searches.  However, when it comes time to measure actual gross margin by item, we need to be careful to craft and confirm we are gathering information correctly to treat discounts appropriately.
  3. Drop Ships: this one is the most common problem I see in the NetSuite community. In my article, Solved: NetSuite Drop Ship Purchase Accruals, we take care of the issue of not having an item receipt which produces accrual measurement problems and thus causes significant challenges in “out of the box” NetSuite gross margin reporting.
  4. Landed Costs: like drop ships, landed costs too are troublesome to handle as NetSuite prescribes.  Most of these challenges stem from accrual problems related to late vendor bills.  Thus, I have offered Offer: Superior NetSuite Landed Cost Practice with Late Vendor Bills along with a number of other landed costs articles to help get in front of this less understood business process.
  5. Other Costs: other than the primary purchase price, I have seen all kinds of “additional costs” that need to get included in gross margin. For example, if a salesperson takes a customer out for a business lunch, this cost was to be included in the margin analysis.  To solve this “other cost” is to generally produce another key that helps you search for and gather up the business lunch costs.  In this article, Project Task Coordination for NetSuite Driven Sales Organizations, I discussed how we solved the production of keys that allow us to gather inputs from different transaction types so we could bring them into the analysis.
  6. Item Kits: this one can be quite challenging if we need item level margin analysis. Because the sales item is different from the delivery item, we can’t use the item to aggregate costs easily. See my article, Understand NetSuite Item Groups vs. Kits to Produce Superior Reporting, which discusses this challenge. While there is a method to partially solve for this (see How To: Generate NetSuite Item Weighted Price from Kits), it’s best to understand that when you use NetSuite kits, margin will need to be analyzed at a more coarse level, such as order, project or customer / job.

Get In Front of your NetSuite Gross Margin Challenge

NetSuite is a powerful general purpose ERP system which can adapt to many different situations. Most of the gross margin challenges I see relate to limited planning during the NetSuite implementation.  These challenges can be overcome but demand contemplation, care and commitment to refine existing practices to enhanced information structures. If you would like to solve for gross margin so you can better run your business operation, let’s have a conversation.

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Marty Zigman

Holding all three official certifications, Marty is Southern California's 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 25 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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