Although the revenue (COGS) is a measure that considerably burdens on the societies’ balances (even until the 75% of the revenues on annual base) nowadays is barely controlled. Principally because it is not easy to control it.
The discontinuous control of this measure, especially in season business, does not allow either seizing the deriving opportunities and neither to evaluate the correct position of the company, exposing it to significant risks.
The knowledge of the COGS allows, indeed, giving visibility to the difference between the purchases and unsold stock and the revenues, enabling opportunities otherwise not usable:
- Analysis of the margins per customer, product (industrial contribution) per effective cost and no more only for standard costs;
- Knowledge of the elements that contribute to the attribution of a cost and of the consolidate margin, at the net of the transfer prices policies.
- Planning processes (budget, forecast, plans) no more managed on the revenues but in relation to the purchases and the unsold stock.
- Strictly linked to the previous point is the likelihood of making financial planning more significally and no more depending on historical algorithms that break up the revenues in diverse elements
- Analysis of the differences between what planned and what financially balanced.
Although this, it is easy to find, in companies, situations in complete discordance with what just reported:
- The managerial closing process does not always balances with the civil law one (even though at the end of the year and with debatable balancing procedures).
- The COGS is calculated to standard and the analysis of the margins per customer/product is done only on this point of view even uf the effective trend can be different both because the standard cost is not effective and because there is a decision in seasons in business.
- The activities of economic planning are done on the margin, obtaining the COGS as derivate.
- The activities of financial planning are done suggesting logics of composition of the COGS based on historical trends.
It is evident that this behavior brings to a less knowledge of business and, consequently, to a less capacity of reaction to external solicitations. The companies must be able to respond to these questions:
- The managerial/statutory balance done only at the end of the year is enough?
- Which is the real contribution/industrial margin? Are we able to decline it per customer?
- Which is the cost of the manpower that the company can deduct in the several productive plants?
The knowledge of the COGS and the consecutive obtaining of the benefits previously listed, pass through three different elements:
Cultural: Not always in the companies, exist the awareness of how to control this measure neither from the organizational point of view, either from the IT one. In addition, we often consider business models that use this COGS, even without knowing it.
Organizational: the link between the cooperation world and the finance one is the key in this type of activity. Therefore, in the company must be institutionalized processes that foster this communication.
IT: Not all the existent tools in the market in support of the AFC area (typically linked to the CPM sector) are adapt to foster and support the planning and control activities of the COGS in the full meaning of the term.
The IT projects in CPM area, focused on the implementation of the processes that involve the finance world (closing, budgeting, forecasting, reporting…) often get more focused on the adjustment of a AS-IS model than on a BPR preliminary activity aimed to the valorization of the most strategic elements for the competitiveness of a company.
Certainly, the COGS issue is critical and has to be considered central in any process in the AFC area. Therefore, the companies have to be addressed in this type of choice to avoid themselves having tools that, even if working well, are not able to increase the development of every company.
Indeed, we often prefer not to engage money and resources in BPR activities or to redesign the control models, and to adopt Excel as escape from the classic processes.
Surely, we have an immediate saving, but the risk of losing opportunities or, at worst, to lose competitiveness become more and more concrete.
Partner – AKC