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Small businesses can use ERP to find hidden costs and increase profit

May 8th, 2012 · No Comments · Business Intelligence, Enterprise Resource Planning, ERP, Manufacturing, Productivity, Small and Medium Size Enterprise, SME

Keeping control of costs is crucial to the success of any business, but it’s particularly important for an SME (small to mid-size business) as any errors can have a greater impact on them than on larger businesses.

Most companies have a good handle on the “big ticket” items, the major components that go into either a discrete manufactured item or a chemical process. It’s tracking the lesser costs that can create problems as freight, customs and a host of many other charges are hard to track and split amongst many items, especially if they come in after the project has been shipped.

Many companies will just gather these costs into a “slush fund” often called overhead, and recover it by applying a fixed percentage against the bigger costs of a project, such as a markup on estimated costs or labour. While this can save time and effort, it can have major consequences as the company grows and takes on larger projects. Those “minor” costs tend to grow out of proportion to sales and can lead to a nasty surprise at the end of a project or accounting period. As you quote on bigger projects where there is more competition just adding a fixed percentage could make your prices uncompetitive. Also, it can hide the difference between profitable and unprofitable products.

Our ERP software allows SME’s to track each individual cost and assign it to a specific project so they can know the real cost of every item that is bought or produced. Even if the cost needs to split amongst several orders or if it comes in after the order is shipped, anything that relates to a specific order can recorded and tracked.

The results of this greater insight can be surprising. One client in the chemical processing sector found that his real cost on a specific item was actually 80% higher than the number they had been using with their old software system! Once he had overcome his disbelief and confirmed that the numbers were indeed correct, he came to a couple of realizations. First and most obvious, it explained why their year-end summaries never seemed to reflect what they thought were good sales.

More importantly, once they took a close look at the numbers they not only realized how much more significant some costs had been than they had previously believed, but now they could see a plan for moving forward with effective cost cutting programs. previously, they had introduced initiatives to lower their costs but were frustrated by the lack of results which they now knew was because they had been targeting the wrong items. Once they knew what was actually affecting their costs they could identify and target  specific areas with much greater effect.

At the end of the day, the greater insight provided by the software gave them a far better understanding of the factors that affected their prices, identified areas for cost savings and made them more competitive in their markets giving them a fast return on their investment in ERP software.

If you’d like to find out how we can help you become more competitive, contact us today!

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