Knowing Order Profitability: The Key to Accurate Financial Statements
By: Erin Mahan
Remember back in high school English class where it was acceptable for everyone to come up with their own interpretation of a book, but in Math class if you failed to come up with the exact solution to an equation it was flat out wrong? This is because numbers are black and white, and unlike words and ideas, have no gray areas. They are one of only a few things on earth that are completely objective, and not subject to outside interpretation. The exact nature of numbers makes them integral to most things, especially business. From production to profit, numbers reveal much about a business’ strengths and weaknesses. They indicate how well a company operates, and they serve to guide decisions within the company. Clearly numbers play a large role in business so it goes without saying that they should be as accurate as possible.
So how does a company, especially paper converters, calculate accurate numbers and figures?
Figuring in the Variables:
Well, like a mathematical equation, the only way to achieve an accurate solution is to include all of the variables. In the paper converting industry there are many variables that need to be accounted for. Converters do hundreds of jobs just in one day, and often each job uses a different grade or cut of paper, for example. Each job has its own set of variables that makes it cost more or less than the previous job, and must be factored into the final figures for cost and profit. Therefore, converters must have an accounting system that automatically shows the figures and order profitability for every individual order. Knowing the cost, profit, and percent profit margin on each and every job makes the overall totals completely accurate. Not knowing the profitability of each order makes it virtually impossible to generate accurate financial statements.
The president of a large paper converting company is talking to his head salesman.
President: You know, John, we’ve had a good year. Sales are up and we’re bringing in money. But I am curious, are we making money on all of our jobs?
Salesman: You know Sir, it’s hard to tell exactly. Right now we do not really have a way to come up with figures for every individual order. We manually put in the figures, so we are unable to actually see how much we are making or losing on each order. At least we’re making money in the end though, so we must be making money somewhere. Hopefully we’re making money on every order.
President: John, hope is not a strategy. We must know the profitability of each and every order.
This conversation is not uncommon. Many converters do not have accounting software capable of showing profit and loss on every order. They simply look at their final Profit and loss statement to see if they are making money, but this fails to tell exactly where money is being lost. It shows only the total sales, total cost of goods sold, and total profit margin. Even if money is made overall, money may still be lost on individual orders. And money lost on a small number of orders over time adds up to big loss for a company. A converting company should always know exactly where money is going. If figures are entered manually, it is unclear as to how much is made or lost on each job. With this approach, the company’s financial statements are uncertain, and the company loses confidence in its performance and numbers.
The Benefit of Knowing Order Profitability
With a system that tracks each order, the converter will know the cost, profit, and percent profit margin on every single job. Being able to see all of the figures on every job lets the converter know where he should set his prices. Without a system that displays each job’s profitability, goods may be sold for too low a price, causing potential profit to go unrealized. Or heavy waste could be causing the converter to lose money on a job. Converters benefit just by being able to tell how much money they are making or could be making.
An Essential System:
Getting the most profit out of every order is ideal, but not impossible. All it takes is a system that calculates the order profitability of every job. It accounts for all money made and lost, and ensures that all figures are completely accurate, giving you, the converter, confidence in your financial statement. If you are not completely confident in your financial statement, call PaperSoft today. It’s the perfect time to start maximizing your company’s profit, and getting the most out of every penny.