Posted On 2023-09-13
Observations and Approach
The observations of the CFO Bridge team comprising of a Partner and Chartered Accountant were:
The Company was using a standard pricing template for all Orders and was not leveraging the concept of Marginal Costing for new customers or critical orders, hence losing orders to competitors.
The allocation of Fixed Overheads to the products was ad-hoc due to which there was under recovery of the costs.
Costs such as cost of credit period extended to customers was not included in the cost sheet.
There were huge variations between Raw Material prices assumed at the time of providing quotation and the actual price while buying the raw material.
The concept of Marginal Costing for Pricing decisions was explained to the management with the authority of using the discretion given to the Directors for key contracts. Some of the competitors were using this concept, and this was the main reason for the company losing critical orders.
The methodology of allocating Overheads to products was simplified based on achievable targets, thereby reducing chances of over or under recovery of overheads
Standard Cost Sheets were developed for all the SKUs based on the approved BOM & Standard input prices
A system was put in place to compare the standard profitability with the actual profitability and identify the gaps due to price and quantity variation.
The actual credit period was computed for the clients, and the cost of credit was included in the cost sheet, thereby penalizing the perpetual defaulters on payment and correcting the pricing to them.
Any fluctuations beyond x% (adverse or favorable) in key Raw Material prices were passed on to the customers
A Manufacturing client in the Blow and Injection Molding Business was losing key orders to its competitors.
The Company had a Pricing template that was being uniformly used by the Sales team for providing quotes. However, there were no linkages between the pricing template and the financials reported by the Company.
CFO Bridge was provided the mandate of reviewing the Pricing template and establishing linkages between the pricing template and the financials of the Company & investigating the reasons for losing critical orders to competition.
The client is now able to offer competitive quotes and win Orders
Pricing is now scientifically discussed with customers. Late paymasters are penalized
With the variance analysis, there is now a linkage of the pricing template with the actual financials.