4/28/2020
BY: RON QUINKERT
Throughout my many years of working with manufacturers around Michigan, I have witnessed companies miss out on great business opportunities because of their inability to submit competitive quotes. How many times has this happened to your company? Have you ever wondered why? How confident are you when you submit a quote to a customer? And what about your current book of business – are you netting the expected results you originally quoted? What might your income statement be telling you? And lastly, have you noticed you only win low-volume work but consistently fail to secure larger opportunities?
Business owners invest in people, equipment, materials and brick and mortar with the hopes of making a comfortable profit. Yet, somewhere down the road, many businesses wonder why they have not quite succeeded. This may indicate that it is time to look at how projects are quoted.
UNDERSTANDING COST MODELS
The key to operating a successful business is the ability to understand finances and share with your team. Knowing the costs of the activities involved in creating and selling product helps to understand and identify profitability.
Two of the most used accounting systems are traditional (flat rate) costing and activity-based costing.
Traditional costing systems are simple to implement but not as accurate. Unlike activity-based costing (as explained below), traditional costing systems apply indirect costs to products based on a predetermined overhead rate. This method is optimal when indirect costs are low compared to direct costs.
Here is the catch… Because traditional costing considers costs for equipment, personnel and processes that might not be required in the project, you may end up over-pricing the job. For example, the engineering department might not be involved but the cost still covers their work. Or, if your company owns an expensive piece of equipment that is only used 20% of the time, all prices will have to increase to cover its cost – making it more difficult to offer competitive quotes. In this way, traditional costing does not always provide an accurate or best quote.
Activity-based costing, conversely, is related to the specific product or part being manufactured. This identifies the actual machines, people and processes used in production. Activity-based costing comes down to utilization. If a machine or person is not being used to produce the part, it will not be reflected in the cost.
EFFECTIVE PRICING WINS NEW BUSINESS
Knowing the difference between the above costing methods, and what they each involve, enables companies to improve quoting and reduce production costs. Recently, I worked with a client who was routinely missing opportunities because their quotes were too high. They were using traditional costing and increased their overhead to cover an expensive machine they rarely used in production. After realizing they could offer more accurate and competitive pricing using activity-based costing, the company decided to sell the unused machinery and outsource those projects instead. They ultimately cut production costs and won more business.
By using accurate costing data, your organization will be better equipped to determine profit drivers, identify problem areas, negotiate with suppliers and customers and offer more competitive quotes. To help your organization with its costing needs, our experts at The Center have developed a cost identification and management assessment to assist with setting up an activity-based costing plan. Additionally, to learn more about basic financial concepts and impacts, register for our free webinar tomorrow at 10 am here.
MEET OUR EXPERT
Ron Quinkert, Senior Business Solutions Manager
Ron Quinkert is a Senior Business Solutions Manager with the Michigan Manufacturing Technology Center. Joining The Center in 2007, Ron works directly with manufacturers in seven Southeast and Central Michigan counties. He is a seasoned professional with expertise in team building, automotive product and manufacturing processes, tool design, operational audit practices, procedures and improvements.
Since 1991, the Michigan Manufacturing Technology Center has assisted Michigan’s small and medium-sized businesses to successfully compete and grow. Through personalized services designed to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at www.the-center.org.
Categories: Finance,
growth