Profitability Analysis of Distributors based on ABC
Take advantage of an alternative to conventional accounting and get a fuller picture of the profitability of your business distributors.
What is ABC?
"ABC is a costing method that allows us to calculate the actual cost and by extension the actual profit of each product/commodity taking into account factors such as:
• Size
• Weight
• Recycling
• Way we sell
• Way we deliver
• Method of payment and collection "
The Purpose of Estimating Profitability with ABC in Distributors
"It is a key strategic tool when your business covers a range of products with very different characteristics.
The ABC is a tool of management accounting and is used to create a more accurate calculation of the cost to help making management decisions. "
Our Methodology
The above questions, critical to the relationship and mutual benefit of media cooperation between industry and trade, cannot be answered with traditional economic analysis media. The Activity Based Costing (ABC) method needs to be used.
First, we collect the total cost of the business broken down into cost categories.
Secondly, we allocate through “Cost Drivers” the total costs to products and other industries.
Thirdly, we analyze the results.
Where is ABC required?
Many industries, particularly the Fast Moving Consumer Goods (FMCG) industry, make use of profitability calculation.
Especially:
Wholesale distributors supply industry products horizontally to small retail locations (e.g. kiosks, mini markets, grocery stores, etc.) or to vertical markets (e.g. restaurants, hotels, pet shops, etc.). We call this channel ‘Indirect’ as opposed to ‘Direct’, i.e. the points directly served by industry.
In its simplest form these traders buy with some fixed discount on the selling price of the products and this percentage is their profit.
This percentage varies considerably from product to product and ranges from 2.4% (e.g. tobacco) to 30 – 40%.
The reason for using indirect channels is economic. Traders sell the products of more industries, so they can share costs and reduce costs. In the economic relationship between industry and trader, the following questions must be answered:
• Trader profits from such cooperation and if so how much?
• Can a product with a gross profit of 2.4% be more profitable than one with a gross profit of 24%?
• Are there industries (in the wholesaler’s range) that finance others?”
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Project’s Deliverables
Deliveries of the project and the objectives of the partnership will be defined before the project starts.
