More and more managers of service-based companies are heeding this sage Texas advice. Traditional accounting reports geared for external regulatory reporting are not meeting the internal decision making needs of most business owners today. Distributors, retailers, hospitals, insurers, banks, home care providers and hundreds of other service-based organizations are using Activity Based Cost Management (ABM) to reduce overhead costs, price services and analyze customer profitability. All in a move to improve the bottom line.
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:
- 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.
- 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?
- 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!
- 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.
- 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.
