How Distorted Costs Undermines Profits The profitability of an option available to your business can easily be distorted. This occurs when a business fails to properly account for the cost-benefit ratio. Failure to do this results in a falsely confident decision that actually causes the business to under perform relative to what would otherwise have been possible. Marginal analysis focuses on identifying what the incremental benefit compared to the incremental cost would be for decisions....
8 days ago • 9 min read
Poor Decision Making in Business Most people make decisions based on their current business performance. They may estimate the costs to produce a contract they're pursuing at $10 variable costs per unit based on historical data. They put in a bid for $12 per unit to allow a $2 unit contribution (selling price per unit minus variable costs per unit). Optimal decisions are guided by weighing the incremental benefit or costs associated with them. The additional order volume from this prospective...
14 days ago • 7 min read
High Costs ≠ High Costs Per Unit Costs of production are top of mind for every manufacturer. Raw material prices fluctuate with changes in economic conditions, regulations, tariffs, and trade policies. Shortages for skilled labor puts upward pressure on wage costs. Increasing energy costs from suicidal green energy and environmental regulations further increase the costs of production. The only way to stay competitive is by creating a Cost Advantage. A Cost Advantage focuses on lowering costs...
21 days ago • 8 min read
Compounding Customer Growth Most success in manufacturing requires consistent sales volumes in order to spread fixed costs over as many units as possible to allow the business to be price competitive by reducing costs per unit. All fixed costs have a relevant range, meaning the level of fixed costs remains unchanged over that specific range of production or sales volume. Operating at the high end of this range minimizes fixed costs per unit produced or sold. Operating at the low end...
29 days ago • 9 min read
Hidden Benefits of a Strong Local Economy The benefit of operating in a local area with a strong economy is often hidden within your manufacturing company's financial data. This is because many of the benefits of a strong local economy are not listed on your balance sheet as assets. But they play a crucial role in creating higher levels of profits and cash flows. The higher the level of local economic activity, the better your business will perform. Strong local economies are key to producing...
about 1 month ago • 8 min read
Price Wars - The Losing Game Too many businesses believe value comes down to being the lowest price producer. The result is being stuck in a price war with their competitors, each lowering their prices in order to win customer orders. Operating in this environment is a race to the bottom. When you're stuck in a price war in the manufacturing industry, you're competing against the entire globe. This is a losing game. Foreign manufacturers are able to price their production far lower than...
about 1 month ago • 6 min read
Making Financial Data More Useful Relying on standardized financial reporting fails to provide enough detail and insights needed to improve the business. Our series covering Decision Analysis has provided the framework required to transform generic financial data into an actionable framework. We've covered how to use Unit Economics and Cost-Volume-Profit Analysis to show the profitability of a single unit of product sold and how pricing, costs, and sales volumes affect profits. By using...
about 2 months ago • 12 min read
All Financial Models Require Assumptions All models require assumptions. The problem is, actual results nearly always deviate from these assumptions. The question is, by how much? Most modeling uses the guidelines of ±10% as an acceptable variance threshold. Variances within ±5% are considered a top of the line model. We have actionable data as to how we can make improvements in the business thanks to Unit Economics and Cost-Volume-Profit (CVP) analysis already covered in previous content....
about 2 months ago • 5 min read
Standard Financial Statements Are Useless for Decision Making What worked in the past is not guaranteed to work in the future. Everything is in constant flux. Selling prices for specific products change. New products are added or dropped. Production costs change as raw materials and conversion costs change. Purchase order volumes change. Your customer base changes over time. Competitors comes and go. You can run your operations exactly as you have in the past, but experience dramatically...
2 months ago • 6 min read