Understanding NetSuite Gross Profit and Cost Estimates

This article is relevant if you are working with NetSuite and you are wondering what Estimated Gross Profit and Cost Estimates mean.

Background

In our article, NetSuite Driven Commissions – Your Way, we illustrated how to get actual cost information about a transaction so that we could calculate out Gross Profit and then drive commissions.    In that article, our focus was around a drop ship versus an inventory stock business.  What is great about Drop Ship is that we can identify the specific transactions that make up the cost side of the sale.   Once we have that information, we can reliably determine actual cost.

However, for a company that stocks inventory, it is trickier.  When you hold inventory, we accountants say that we have “capitalized” the value as an asset on the balance sheet.  There are different methods of capitalization, such as Average, FIFO, and LIFO.  What these methods do is produce a consistent mechanism to apply incoming costs against the same materials over different batches.  Each of these batches may have a different purchase cost.   Many times, the cost of materials include “landed” elements such as duties, insurance, freight and so forth that ultimately burden the investment required to get the inventory into stock.  Let’s not talk about labor but this too can be considered.   You may want to read our article, Assessing NetSuite’s Cost of Goods Sold Tracking Methods.

What’s important to recognize is that material costs change over time as they are accumulated and depleted.  Since NetSuite is a real-time inventory management system, it has the opportunity to inform you of item costs at a moments notice.  That’s pretty powerful — but usually greater power demands more learning to make good interpretations.

Estimated Cost and Gross Profit

With that background, what I hope to convey is that stocked inventory has different considerations than non-stocked inventory.  If you consider the sales cycle, starting at a quote, through the sales order, through the item fulfillment and finally the invoice, inventory cost may naturally be changing due to product sourcing activities.

When running a business that is Gross Profit oriented, the desire to understand cost and derived gross profit early in customer interactions (i.e., sales) is often desired. This is especially true if salespeople have the freedom to modify sale prices so long as they meet minimum gross profit levels.

NetSuite makes the offer to bring forth information it knows about costs and hence gross profit during each step between producing a sale and fulfilling on an order.   Since we are moving forward in time, and siutations can change, questions naturally come up.  For example, if during the sales order process, we see that gross profit is 25%, but now that we moved on to pick, pack and ship, do we want the latest information about cost and gross profit to update the related item fulfillment record?  Might we do something different during fulfillment if gross profit now becomes 22%?  Maybe.

Avoid Confusion

I have heard numerous times from clients that the costs and gross profits is incorrect.  Upon deeper inspection reveals that there are background inventory and accounting  processes going on that are modifying costs (manual inventory adjustments are common culprit) and, depending on the NetSuite account configuration, the software behavior will make changes to information as you move through the natural fulfillment and accounting process.

To avoid confusion, I recommend you do not activate this feature until you are well grounded.  It seems many are blind to the word “Estimated” that is ever-present throughout the application.  “Estimated” is also pretty “squishy”.  It means no commitment.   Once you are clear why you want Estimated Gross Profit, you can then back into the NetSuite configuration that will yield the best results.   The implications with each configuration option take some thinking and I want to avoid repeating what NetSuite’s Help document tries to provide.  Instead, get clear on your business purpose and how you want your staff and other business actors to work with “Estimated Gross Profit”.  With that in mind, you can then back into the optimized configuration and work to produce a shared team interpretation.

Enhance NetSuite to Drive Estimated Costs

Finally, NetSuite’s Estimated Gross Profit calculation can be enhanced by SuiteScript programming to “stamp” transactions with information as they move through the process.  This stamping can hold values that may be important for subsequent analysis — perhaps when analyzing business performance or explaining why commission payouts are understated.  The real power of these platform tools come forth when you take matters into your own hands.

Get Assistance

NetSuite is a powerful business system and is even better because it can be enhanced to fit your unique requirements.  If you would like more conversation, contact us.

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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