Background

Healthcare delivery and financing aren’t getting any easier. Managed care requirements, the BBA, compliance, and outpatient prospective payment are all adding layers of complexity to the administrative burdens of healthcare providers. No longer is this only an administrative or bookkeeping exercise either. Now payors require that business office personnel also be clinicians who can discern whether or not a service is medically necessary and thus reimbursable. Some legal knowledge is also handy as personnel must sort through complex program compliance issues or deal with an account involving subrogation.

In order to continue to get paid and maintain cash flow, providers have set up further levels of specialization. The result has meant more handoffs, more delays, eroding financial positions, and a much more frustrated set of customers.

What can we do about this? So much of it seems beyond our control. When you factor in the maze of new technologies, it starts to get a bit overwhelming.

The ABC’s of Access Management

We have to start with the patient. At the hub of the patient experience is what is now commonly called Access Management, formerly referred to as Admitting or Registration. This group has the job of collecting enough information to satisfy the clinicians treating the patient, meeting the requirements of Joint Commission and other authoritative bodies, and getting the ball rolling on collecting and settling the account. In other words, the Access Management area has numerous customers in addition to the patient or family member sitting across from them.

Without the benefit of relevant information, providers have attempted to staff Access Management based on past history – namely, if patient and physician complaints aren’t too high, there is probably enough staff. However, staffing in Access Management has not kept up with the increased demands and complexity of the process, and thus other areas are suffering. Clinicians and medical records personnel deal with incomplete or incorrect information. Claims information is incomplete and left to back office to sort through. And all of these things make for a much more unhappy set of customers (both physicians and patients) as they continually have to live with the repercussions of inaccurate and incomplete information.

As the chart above shows, Access Management is the hub of the patient experience and kicks off several processes in the hospital setting: medical record documentation, patient flow, revenue capture, and billing and collections. In each of these areas, we are dealing with an inordinate amount of rework as information that should have been collected and verified in Access Management is corrected or added in other areas. This does not go unnoticed by patients and physicians as these situations erode their confidence in the hospital’s ability to get things right.

Access Management is the area that has the first chance to create the “emotional contract” with the patient that the hospital must have if it is going to be successful. It is here that the tone is set for the patient on the issues with respect to their hospitalization. And it is here that the provider has the chance to begin working on the patient’s behalf to get all the information correct so that the clinical outcomes are appropriate and the account is settled in a timely manner. All of this must happen in an environment that minimizes the likelihood of any of this occurring outside the realm of the complex legal requirements established by state and federal officials.

So why do we let unresolved issues out of the Access Management area? In a manufacturing environment, if there are problems on the front-end design or in the manufacturing process itself, huge problems ripple downstream in terms of recalls, warranty related expenses, lawsuits, and customers that abandon the company’s products. World-class manufacturers dealt with these issues with their TQM and Six Sigma programs during the 80’s and 90’s. Providers, however, are letting the issues in their manufacturing process (Access Management) create huge and costly problems for them in downstream processes.

The first step in understanding the overall implications of this is to analyze how much these non-value-added tasks of reworking are costing the hospital. The way to tackle this is using a discipline that manufacturing adopted in the 80’s and 90’s – activity based costing. In a relatively short period of time, the activities in Access Management and related areas can be identified and costed. The costing is done against relevant workload measures. Thus you can learn what each significant activity is costing in terms of the work that is being produced. Each activity is also identified as value or non-value-added, further identifying issues in the process.

Today, hospitals are looking for a silver bullet answer to their Access Management and Business Office problems. It is hoped that a new Internet technology or outsourcing partner can provide the missing piece of a complicated puzzle. However, it is hard to imagine planning for these types of changes without first going through the analysis of the activities that are consuming the resources of the hospital. That is exactly what activity based costing does. With the information on the cost of the activities, providers are armed with the information needed to make staffing, technology, and partnering decisions. The goal of each of these decisions is to lower the overall cost per workload measure and improve the quality of the process, including the downstream activities.

Getting Started

Every provider must take a proactive role in dealing with this trend. The next few years will prove pivotal in adapting to the new age of the empowered customers, Internet technologies, and more demanding payment plans. The first steps in this journey are assessment and planning.

The assessment is not a management engineering set of time studies aimed at micro costing every second of work. The information needed for this plan is collected in a few days by talking to the people performing the work. Estimates are gathered based on workers’ views about how they spend their time. This information is combined with available workload measures and general ledger cost information, and activity based reports are produced.

From there, it is an exercise in planning. Activity based information is used to look at areas where work can be restructured so errors and rework can be eliminated. New technologies that target problematic activities can be selected and implemented. Outside companies that can perform complex activities more economically can be evaluated.

Conclusion

Few doubt the clout that the consumer will have in the emerging healthcare environment. The customer’s experience with providers will play a much more important role in the future with regard to growing and sustaining market share. Thus, improvement efforts have to begin where we begin the customer relationship – in Access Management.

Activity based costing is a proven tool for analysis that can be applied easily to the Access Management area. It provides information that is essential to the critical decisions that must be made if the provider expects to provide excellent customer service in the coming years. Also, activity based costing and management tools can be applied in many other ways throughout the providers’ operations. TQM and budgeting programs benefit nicely from this type of analysis.

Manufacturing learned this a long time ago — you have to understand the activities that are occurring if you hope to make sustainable improvements in your operations. Providers rarely have the ability anymore to significantly grow the top line. It will be critical that these types of analysis begin to occur in the provider setting if they hope to lower cost and improve quality. And what better place to start than at the hub of the patient experience.

Contact: Lance Lott llott@infoad.com
Tom Dugger tdugger@infoad.com

© Copyright 2000 InfoAdvantage, Inc.

It would be prudent and smart for home medical equipment (HME) providers to create “separate checks” for their products, services and customers. Traditionally, HME owners have assumed that all overhead expenses apply equally to all products and customers. As an example in Table 1, this business owner would be led to assume that every dollar of revenue consumes 27 ½ cents of overhead expense. Intuitively, business owners recognize that certain sales transactions consume more overhead cost than others, e.g. a delivered order consumes more cost than a customer pick-up. But monthly accounting reports don’t report the “facts” to confirm these “feelings” (see Table 2).

To address the need for financial facts, home care firms are using Activity Based Costing (ABC) to create “separate overhead cost checks” for their different types of customers, services and product lines.

What is ABC?
Activity Based Costing is based on a simple principle … activities consume resources and customers consume activities. Associating the labor and overhead expenses of the business with the activities that consume those resources provides valuable facts. Financial facts that can be used to improve decision-making and identify cost improvement opportunities.

The basic building blocks for ABC are activity accounting spreadsheets for each group of employees in the business. Typical groups in a home care company would be Delivery, Billing, Customer Service, Therapy, Repair, Sales & Marketing, Accounting, Purchasing and General Administration. Table 3 shows an activity accounting report for a typical home care billing department … the columns are the activities and the rows are the resources. The workload of each activity is measured resulting in a cost per output. As is often the case, the average cost of re-submitting a claim is more expensive than the initial submission.

Steps to Implement ABC
Implementing ABC is a Five-Step Process:

• Step 1:Create an activity accounting spreadsheet (like the one in Table 3) for each group of employees in your company. To define the columns, ask each group of employees to list their 5 to 10 time-consuming activities. Most home care firms have less than fifty (50) activities.
• Step 2:To fill in the rows on the activity accounting spreadsheet, estimate the amount of wages, fringes and other overhead cost consumed by each activity. Be sure to include space cost and depreciation. I recommend that you use twelve-month actual cost for this step, not budget.
• Step 3:Ask each group of employees to collect their output measure (workload) quantities for the past year. Divide each activity’s total cost by its output quantity to calculate cost per output. For example, the average cost to submit a claim in Table 3 is $75.40. Therefore, you know that you’re losing money on any claim submitted for less than $75.40 of revenue. Evaluate the cost per outputs for reasonableness before proceeding to the next step.
• Step 4:Select one high-volume and one low-volume customer to analyze. For example, you may want to analyze the profitability of a customer that requires daily or weekly nursing visits versus one that comes in once a month to pickup a replacement oxygen bottle.
• Step 5:Determine the gross margin (revenue minus cost of goods sold = gross margin) for each of the two customers. Then subtract the cost of activities consumed by each customer from the gross margin. Is each customer profitable or not? If not, does the list of activities consumed by the customer provide you insight as to how you could make them profitable?NOTE: There will be some business sustaining activities that will not be directly traceable to customers, e.g. Issue Purchase Orders, Do Housekeeping, Attend Meetings, etc. I recommend that you add up the total non-traceable cost and then allocate based on each customer’s percent of total sales dollars, e.g. if a high volume customer provides 5% of total revenue they would get allocated 5% of non-traceable costs. If non-traceable activities consume more than 25% of total overhead cost, you will likely find it very difficult to be a profitable company. The reason is that non-traceable activities rarely create revenue or customer satisfaction!

Uses of ABC
I have heard it said that the lottery is God’s way of punishing people who are bad at math skills. I believe the same can be said for the use of 1940’s-style accounting reports (Table 1) in 2000’s home care. The management of gross margin percentages is simple. But in today’s competitive marketplace, a focus on gross margin is simplistic. Traditional accounting reports are formatted for external compliance reporting, e.g. I.R.S., banks, etc. ABC is formatted for internal decision-making.

HME owners are increasingly discarding their monthly focus on traditional accounting reports and periodically using ABC to help make many types of decisions:

• Setting minimum order quantities.
• Setting prices.
• Analyzing customer profitability
• Analyzing service profitability
• Analyzing product line profitability
• Analyzing retail versus delivery profitability
• Analyzing payer profitability
• Analyzing branch profitability
• Bidding and/or quoting prices
• Target costing new services

Here are some examples of “how to use” ABC:

Fire customers that consume more activities than their gross margin will cover! But before you “fire” any customer, add to the decision their accounts receivable balances and payment histories. What you will often find is that not only are you not making money on their orders, but you are also banking for them with your accounts receivable as well.

ABC customer profitability analysis not only identifies profitable and unprofitable customers, ABC also provides methods to turn losers into winners:

• Make losers cash-only customers. Eliminate billing and accounts receivable activities.
• Use activities to create menu-based pricing, e.g. charge for delivery, charge for returned goods, etc.
• Do not allow losers to consume your value-added services for free.

Many HME owners need more shelf-control when it comes to which products and services they should offer customers. Published gross margins can be misleading. For example, one home care firm met with a sales rep that wanted to demonstrate a useful new product. The new product had a recommended list sales price that results in a 20% gross margin. Normally the home care owner would not have carried the product because overhead costs are 27.5%, resulting in a pre-tax loss of 7.5%. But the business owner, using the principles of ABC, realized that many of the home care overhead activities would not be incurred with the sale of this new product. With this ABC knowledge, the owner decided to add the new product to the sales shelf. The product became a big seller for all the branches, adding significant profits to the company. ABC helped the owner make a good shelf decision.

Menu-based pricing is another popular use of ABC. The most costly activities of a home care company are typically services that are being performed for the customer. The higher cost, higher volume activities of the home care firm serve as a basis for a menu of services and prices, e.g. Make Delivery, Process Return Goods, etc. If customers are not charged for costly activities, they may incorrectly assume that you’re providing the service for free! Creating an ABC Bill of Activities will alert home care managers if they can afford to sell what they are currently offering customers on the firm’s menu of services.

A recent personal experience highlights the importance of using ABC to set policies. My 79-year old father recently had successful triple bypass surgery. The doctor prescribed an oxygen concentrator on the Sunday my dad was released from the hospital. Someone on the hospital staff selected a home care firm to make the delivery. If the selected home care owner subtracted the cost of the activities consumed in the two-hour roundtrip delivery and subsequent return two weeks later, I seriously doubt that any profit would be left from the $228 fee. Apparently the home care owner had a policy of accepting any business, no matter the distance from the store. While noble, it makes little or no sense.

Repeat Steps 3, 4 and 5 for product lines, service types, branches or any cost object needing analysis. ABC provides insight as to where you’re making money and where you’re not in your business.

Cost versus Benefit
Implementing ABC can provide significant benefits … improved pricing, better marketing strategies and more profits despite lower reimbursement rates. But there is a cost of implementing ABC. There are three basic implementation options that vary in cost:

• Option 1:Self-implement ABC using one of your existing staff, a spreadsheet and a book. While project length depends on the size of the business, most small to medium home care firms can implement ABC in 60 to 90 days with a staff member dedicating 30-60% of their time to the project. If there is no available staff member for an ABC project, don’t overlook local university or college professors and students. Many are looking for ABC experience and will do the work for little or no money. Excellent books are available on the topic of ABC. Probably the most relevant for home care is “Activity-Based Management: A Healthcare Industry Primer“. It is available for $40.00 from the American Association for Homecare, Association for Healthcare Resource & Materials Management or from ICMS, Inc.
• Option 2:Self-implement ABC with the aid of a Homecare Toolkit. Each toolkit contains a homecare activity dictionary, PC-based ABC software, step-by-step instructions, aforementioned primer and homecare case study. Toolkits can be purchased on the ICMS.net web site for $3,995.00. Other ABC software products to consider include OROS from ABC Technologies, Metify from Armstrong Laing and Activa from Oracle.
• Option 3:Hire a consultant to implement ABC. While this is the most expensive option, it will be the quickest path to success. If your organization is in dire need of improved cost management, hiring an ABC consultant may be the best option. Average fees of consultants with home care ABC experience vary from $1,500 to $2,500 per day. The amount of consultant work typically varies from five to twenty-five days, based on the size and complexity of the project. After the ABC software model has been created, most small home care companies update the numbers once or twice a year. Medium to large firms will typically update the model quarterly. The activities rarely change but the cost and workloads do.

Conclusion

Zig Ziglar defines disappointment as the gap between expectation and delivery. Many home care business owners expecting a reasonable return on their investment are disappointed with their current financial condition. And while they may get some temporary pleasure in blaming others … such as Medicare, Medicaid, HMO’s, Health Care Financing Administration … for current financial problems, it is up to every business owner to close the gap of disappointment.

In the newly published “17 Lies that are Holding You Back & the Truth that will set You Free“, author Steve Chandler lists number 8 as “I worry because I care. We worry because worrying is what we do all day to avoid taking action.” Worrying will not improve your home care company. Action will! Implement ABC. Create “separate checks” for your products, services and customers. Convert your profitability “feelings” into “facts”. Use ABC as the basis for a fresh start to your firm’s improved financial future. 

How much overhead cost is enough for your business? Do you have too much or not enough? It is difficult to answer that important question using a traditional accounting report. The typical P&L format shown in Table 1 causes more questions than it answers:

• Why did we fail to meet the 5.4% profit plant? Our 30% gross margin exceeded budget and we under spent overhead expenses by $10,000!
• Do I have any waste in overhead? If so, where and how much?
• How many people do I really need to run this business successfully?
• If we added overhead to the business, could it actually result in more revenue and profit?

To answer these questions and many others, home care firms are using Activity Based Management (ABM) to right-size their overhead costs.

What is ABM?

Activity Based Management is based on a simple principles … activities consume costs. Allocating overhead costs of a business to the activities that consume those resources provides valuable new facts. Facts that can be used to identify and eliminate non-value added waste.

Traditional accounting measures how much resource was consumed by a department or group of employees. ABM measures what they did with those resources.

ABM Quick Start

All it takes is approximately 90 minutes to quickly demonstrate the principles and benefits of ABM in your company. The basic building block for ABM is an activity accounting spreadsheet (Table 2). The columns are the activities; the rows are the resources. The workload of each activity is measured and costed. For example, it costs $37,700 to submit claims. Five hundred claims were filed. Therefore, on average it cost $75.40 to file a claim. This basic information can be used for improved decision-making and cost improvement.

Seven Quick Start Steps:

• Step 1 –Select a small department or group of employees for your ABM demonstration. Pick a group that is receptive to the idea.
• Step 2– Using a flip chart to visibly record their answers, ask the employees to list the 5 to 10 significant activities that consume a typical week or month. Significant is defined as more than 5% of their time. Use their estimates, not a stopwatch time study.
• Step 3– To determine Value or Non-Value, ask the employees which activities they do not enjoy … these are the non-value.
• Step 4– Define an output measure for each activity, e.g. a measure of workload. Refer to the examples shown in Table 2.
• Step 5– With their advice, allocate the group’s last three month’s overhead expenses to their activities. Note: If you don’t have a departmental cost report, estimate how much of your total company spending was related to this group of employees.
• Step 6– Gather output quantities for the past three months. Estimate if you must.
• Step 7– Divide the output quantity into the activity cost to determine the cost per output (see Table 2).

Traditional HME overhead accounting reports are two-dimensional:

1. First, expenditures are classified by cost account (i.e. supplies, telephone, etc.);
2.Then, cost accounts are classified as fixed (i.e. space) or variable (i.e. supplies).

To better meet the growing needs of HME managers, an Activity Based Management system is multi-dimensional. ABM provides seven new overhead cost perspectives:

1. Gross cost of each activity;
2. Cost per output of each activity;
3. Value versus Non-Value activities;
4. Primary versus Secondary activities;
5. Required versus Discretionary activities;
6. Business sustaining versus revenue sensitive activities; and,
7. Activities by business process (e.g. procurement process)

Variety of Activities 
Activity classifications provide managers a multi-faceted tool to analyze and evaluate the business:

• Value activities, as the name implies, provide value to both the customer and the business. Submit Claims adds value. Re-Submit Claim is non-value. Typical HME’s find 25% non-value added costs at the onset of ABM. Multiply 25% times your annual overhead budget. How much waste is it? ABM can help you find it and eliminate it!
• Primary activities support the mission statement of the company. Secondary activities, as the name implies, are not directly related to the company mission. Employees will often classify activities that they feel are outside their realm of responsibility as secondary, e.g. It’s not my job to do that! HME’s frequently find 20% secondary activity cost. The benchmark is 10%.
• Required activities are performed to meet customer or external regulations. Discretionary activities add value but are candidates for elimination if profit margins fall short of budget. The HME owner or president should apply the required versus discretionary classification based on short-term financial needs. When profit margins are low or non-existent, many value activities may end up being classified as discretionary.
• Business sustaining activities, as the name implies, to not fluctuate with increases or decreases in revenue. Common examples include Do Monthly Accounting, Train Employees and File Tax Reports. While important, business sustaining activities do not create revenue. In any low margin marketplace, business sustaining activities should not exceed 20% of overhead.
• A business process is defined as a series of activities that cross-functional boundaries. Activities can be classified and flowcharted into a process. Typical HME business processes include the Procurement Process, Order Fulfillment Process and the Compliance Process. ABM business process reports are a useful tool to give employee-led process improvement teams.

Seven Discontinuous Decisions
Activity Based Management is a powerful new technology, but only when it is used. To be of value, ABM must be applied, not simply analyzed. After you’ve created your ABM Quick Start spreadsheet, find a quiet place and ponder these seven overhead changing decisions:

1. DROP… Are there any activities in the department that should be eliminated or minimized? Frequently these will be non-value added or time consuming secondary activities. As an example, we recently installed e-commerce on our web site. During a quarterly review of our office activities I noticed that we will still performing old paperwork activities with the new web-based technology. We dropped the old activities and improved the cost, cycle time and quality of the order fulfillment process.

2. DEFER … Are there any activities that you should defer to a later time? When profits are lacking, discretionary activities should be deferred to the next quarter or year. I would like to “Train Employees”, but it may make better sense to defer this activity to a later time. I’ll do it. But not now.

3. DELEGATE … Are there any activities that should be performed by someone else? ABM frequently exposes activities that could or should be performed by lower cost employees or outsourced. One of our administrative activities is “Shred Confidential Files”. It was more cost effective to buy this activity from an outside company and re-deploy my staff’s time to creating revenue.

4. DOMINATE … Are there any activities that we are really good at? If yes, are we promoting them properly to the customer? Someone once asked Walt Disney his secret of success. Disney’s response was “Do something so well that the customer will pay to see you do it again.” Do you have any dominant activities? If not, why not?
5. DEPLOY … Is there an activity that should have its time and resources re-deployed to another use? A time management expert once told me that the average person, because they’re unorganized, spends one hour per day searching for what they need to do their job. One hour per day equals six weeks! Redeploy searching time into getting better organized.

6. DARE … Select one activity for improvement. Dare your employees to submit a plan to you tomorrow for approval. Challenge them with a 10% productivity improvement goal. Share the savings with them.

7. DEFINE … Define an activity that the department should be doing but they’re not. Maybe it should be a customer service activity. In her popular book Customer Loyalty fattens the Bottom Line, Sharon Sullivan says “A company can increase profitability by as much as 125% if it boosts retention of its current customer base as little as 5%. Replacing customers is 5 to 6 times more costly than retaining current customers.” Don’t relegate yourself to doing the same activities day end and day out. Be creative. Define something new!

Action or Procrastination … which are you going to choose?

Most home care owners see the need for overhead cost reduction on their monthly accounting reports. Reimbursement reductions coupled with rising overheads result in shrinking profit margins. And even though most managers have heard of the benefits of using ABM to reduce overhead and ABC to improve decision-making, they put off implementation. The systematic and habitual putting off of important activities can usually be attributed to one or more root causes. The causes may differ but the effect is the same. You fail to accomplish something you want and need to do.

Why do HME managers procrastinate?

• Fear of method… Home care managers incorrectly assume that ABM/ABC is a new, untested method. While ABM may be new to you, it is in fact a sixteen-year-old, proven methodology.
• Fear of failure … This actually is the fear of failing to meet your own, possibly unrealistically high expectations. Even when implemented in its simplest form, ABM always provides valuable new cost management insight.
• Fear of implementation… Many managers are afraid of ABM’s implementation costs. Facts are just the opposite. Several low cost implementation options exist. Several reasonably priced, home care savvy consultants exist. Or you may want to consider using an ABM-educated college student with spreadsheet software. Or another low cost option is to purchase a self-implementation toolkit that includes ABM software, Activity Dictionary, Case Study and step-by-step implementation instructions.
• Fear of success … Some managers avoid success in order to maintain the status quo, e.g. “If ABM exposes 30% non-value added overhead cost, then I’ll be forced to make some changes to the business.” The first step towards improving your P&L is admitting that you need to improve it.
• Fear of surrendering control… Every deadline missed is a battle won in the war to maintain absolute control of your business. Continually postponing an analysis of your overhead cost (ABM) and product line profitability (ABC) is a subtle way of saying, “See, I’m really in control.” Are you afraid that ABM/ABC may show you’re favorite product, service or customer is a big loser?

Conclusion
In his number one best seller, Who Moved My Cheese?, author Spencer Johnson M.D. reminds us all that “the quicker you let go of old cheese, the sooner you find new cheese.” Are you praying for new and improved profits while still holding on to your old accounting reports? The quicker you let go of the old and move to the new principles of Activity Based Management, the more likely you’ll enjoy the benefits. ABM brings new clarity and creativity to the old topic of overhead.

How much overhead cost is enough for your business? Only you can effectively answer that question. But with ABM to clarify the decision, I am confident that your results will be much closer to your financial goals.

The results are in! Based on the Institute of Management Accountant’s 1997 survey, service organizations are enjoying very positive results with ABM. ABM is no longer just a tool for the rich and famous manufacturing firms. “How To” workshops, books and ABM Software Tool Kits have made it possible and practical for all types and sizes of service organizations to successfully implement and enjoy the many benefits of ABM.

Typical Uses

There are five common uses of ABM by service organizations:

1. Identify waste

Multiply 20% times your annual overhead budget. Wouldn’t you like to redeploy that waste to your bottom line? You can with ABM. Many service organizations work on razor-thin profit margins. They need a “quick-fix” pickup for the bottom line. Within 30-60 days, an ABM implementer can identify 20%-30% waste in an overhead budget. A list of waste-reduction action plans can then be quickly prepared, approved and implemented.

2. Identify the cost-to-serve

How much does it cost to expedite a claim? Does it cost the same to serve high and low volume customers? What is the minimum order size to break even on a delivery? Service organizations that don’t understand the cost of daily transactions are living dangerously. A plumbing distributor that implemented ABM last year was shocked to find that their break-even for a delivered order was $150.00. The owner quickly instituted minimum order quantities and began an employee continuous improvement program to reduce overhead costs. What daily and weekly transactions do you need to analyze?

3. Menu-based pricing

Gross margin pricing may be the K.I.S.S. of death. Pricing products and services to achieve a universal gross margin target percent is simple but dangerous. Gross margin pricing assumes that all overhead costs apply equally to every product, service or customer. As a service organization’s portfolio of services and customers grows, traditional gross margin-based pricing methods will lead you to overprice high volume products, services and customers and underprice low volume products, services and customers.

Can you afford to lose your high volume customers? If not, then you should evaluate ABC menu-based pricing. Your menu will be comprised of the significant activities (services) you offer customers. For example, distributors in several industries are separating the price of products from the price of delivery and other services (e.g. expedite, EDI, automatic replenishment). Implementing ABC is guaranteed to be an eye-opening experience!

4. Customer profitability analysis

All customers are not created equal. It is not uncommon to find with ABC customer profitability analysis that 80% of a service organization’s profit comes from 20% of its customers. It is crucial for any business owner to know where their business is making money and where they are not. ABC analysis highlights how much more profitable it is to keep and grow existing customers in lieu of the expense of constantly searching for new business. Who is your most profitable customer? Why? ABC customer profitability analysis answers those questions.

5. Proof that you’re adding value

Distributors are under the gun. They are being asked by both manufacturers (supplier) and retailers (consumer): “What value are you adding to the supply chain?” ABM analysis provides the facts and figures to answer that question.  Are your employees busy? Sure they are. But the real question is: “Doing what?” Traditional accounting reports tell the business owner: “Here is the cost of resources that you provided each manager last month.” ABM analysis tells the owner: “Here is what the manager and the employees did with those resources.” ABM highlights the value and the waste of resources.

Conclusion

Are you riding a dead horse accounting system? Dismount and end your frustration. Get answers to the important cost and profitability questions that confront your organization. Implement an ABM system in 90 days or less. Call Christine at 1-817-475-2945 for a free 90-day Self Implementation Plan.