Net profit boosters
From the April 2017 print edition
This article covers ten tested best practices to increase net profit by more than 10 percent through finance and sourcing orchestration. Any one of these practices generates a one- to five-percent net profit increase, but only some may be applicable in a given company or industry. But when combined they have enabled over a 10-percent net profit improvement in six months, with no investment. In the examples below, the organizations have between $200 million to over $10 billion revenue in the US and Canada.
1. Payment Terms—Increase payment terms to two percent 20 net 60 days. In one organization with $3 billion addressable spend, the new terms were broadcast using a blitz, and vendors with 25 percent of spend accepted immediately, thus enabling $3 million savings. Dynamic payables discounting (used by JP Morgan) and supply chain financing/factoring are other opportunities that can implemented.
2. Corporate and vendor rebates—Corporate rebates from a parent company based on total annual spend need to be negotiated. Differentiate by contract interpretation the higher rebate of 1.5 percent on municipal sales, against 1 percent for federal sales. Group buying enabled rebates of over $20 million on $2 billion revenue with no investment.
3. Audits —Sourcing access to invoice scans enables one percent to two percent audit savings of addressable spend. Audits identify penalty payments, correct transaction volumes/hits and avoid payments for systems/users/HW not used.
4. Contract serial number—Payment should be made only against a contract with the contract filed in a database. Yet less than 25 percent of such documents are in a database for reference and rate checks. A spreadsheet maintained by finance can provide serial number control. Poor contract management additionally results in a three- to five-percent loss of the 10 percent in savings that sourcing initially contracted.
5. Forecasting—The use of demand management solutions—including algorithms in SAP (APO), JDA, and global trade management in retail—can result in errors running into millions of dollars, and as a consequence getting 10 cents to the dollar for consignments arriving after the season is over. Instead you can replace 200 vendors with two preferred distribution vendors responsible for all inventory. This can result in a gross margin increase of three to five percent and the elimination of obsolescence of one percent of revenue.
6. CAPEX spend—Value analysis can reduce project cost by at least 10 percent. The construction costs of 100 stores have been reduced by 40 percent by elimination of false ceilings that enabled using cheaper roof mounted lights, sprinklers not in the ceiling and no air duct lowering. In this case, reducing CAPEX spend enabled an increase in net profit through reduced amortization. An organization eliminated their truck fleet amortization by getting a $700-million payment towards working capital, then leasing back the trailers with drivers at a lower OPEX cost.
7. Addressable spend increase—Addressable spend is 50 to 65 percent of revenue per CAPS, while for banks it’s around 20 percent since banks report revenue, net of interest. Financial institutions that include interest, credit card fees, agency commission and brokerage fees as part of addressable spend enable increase in net profit by over 10 percent.
8. Licensed users and maintenance support—Define ‘user’ in a contract as the actual user of the software and exclude managers, IT, Database architects and trainers can reduce license cost by over 50 percent sometimes. Adding a clause stating that 20 percent of support payments can be reduced pro rata when ‘users’ reduce also helps to increase net profit.
9. Tail end spend—Tail end spend is 10 percent of addressable spend, through ‘C’ class vendors numbering 1,000 to 40,000 depending on company size. Concentration on ‘A’ class vendors in a mature procurement organization can result in only 6-percent spend savings on ‘A’ class vendor spend. Meanwhile, for ‘C’ class vendors, savings can be 25 percent. Therefore, ‘C’ class tail end spend savings are about 60 percent of saving of ‘A’ class. Tail end spend best practices are group buying (like Advantage of Coupa) or spot buy (like eBay and monthly invoicing using Ariba).
10. Taxes, Duty and insurance—Detailed AP analysis reveals opportunities for net profit increases with no investment. Such areas include TMI (taxes, maintenance and insurance) contracted at 10 to 20 percent of lease/rental payment but actually 40 percent of lease payments; duty reduction’ business/municipal tax reduction; self insurance; profit insurance by Lloyds, SR&ED credits, et cetera.
Eugene Fernandez is principal consultant, Eugene Fernandez & Associates.