Hello and thank you for watching this short video.
My name is Paul North and I’m the Founder and MD of Illuminis Insight Software, home of the Illuminis business intelligence solution for SMEs.
Today I want to talk about the extraordinary power of business intelligence software to allow you to easily and quickly identify – possibly for the first time – exactly how much profit you are making on any individual sale, or customer.
In this video clip from a presentation I gave in partnership with Cranfield University School of Management, I explain exactly what I mean.
One of the measures that we find really makes a difference is actually looking at gross margin.
Just to be clear for the non-accountants in the room,
by that I mean gross margin is the percentage of your sales that your profit is.
So it’s this ratio between your sales and your profit.
Less than a 1/3 of people actually measure these at all and what we find is that
most actually don’t really target gross margin at all.
Most businesses when you talk to them say “yes, my gross margin is 30%”.
And they’ve got a kind of “this is the number that we know is kind of the number in our business”.
But if you look at a P&L, although it has the numbers to show that,
there’s never a line that says “and my gross margin percentage is…….whatever”.
It’s just “here’s my turnover, here’s my profit”.
And its not looked at often in very much detail.
The problem is that it’s really time consuming to calculate that on any kind of granular level
because there is an awful lot of data involved in making that happen.
But of course, if you have a software approach then you can analyse that gross margin from pretty much every angle
and you can drill down to the base detail,
And we know from working with our customers, this is something that makes a massive difference on profitability.
I’m going to give you some examples using screenshots from our product.
This is one of our classic Octelas reports. What it’s showing you is sales turnover each month for a particular business.
We’ve got figures on here which are to do with this year’s numbers;
last year’s numbers; variance against those numbers
we can see variances, green being good ones, red being bad ones.
Really quick and simple to see them.
We’ve got target information in there and we can do some visualisations to have a look at those things in nice graphical formats too.
We’ll take a little look at the graphs at the bottom.
The left-hand side is month by month, the right had side is a cumulative across the year.
In very simple terms, the yellow line is what we did last year, month on month;
the black line is what we plan to do this year, that’s what we’re aiming at, that’s our target.
The red is what we’ve achieved so far.
So what I can see from the chart at the top there is that by the end of January,
with 2 months to go on this particular business’s turnover,
after 10 months, our sales are 3.7% up
That’s pretty good, we’re growing.
We’re growing more than inflation. That’s great news, we’ve got there.
But because this is built on top of this combined data in this really powerful database system
that can crunch huge amounts of numbers really quickly,
and I’m talking about something you can run on a laptop,
I’m not talking about a really big thing, these are things we all have access to.
We can start looking at those numbers in different ways.
Instead of looking at those figures by the value, lets just make a couple of clicks and turn that into a gross profit.
So now I’m actually looking at how much money did we make.
So we can see the same graphs, the same sets of numbers
but we can look at them in different ways.
Again, it still looks pretty good doesn’t it.
Our red line is above our yellow line, its even above our target at the gross profit level.
So we’re really doing quite nicely and its all looking good.
And again, if I look at the end of the January month’s figures, year to date we’re at 3.4% increase on profit.
So again, happy days. We’ve made more money; we’ve sold more goods.
Things are really good. Business is going well isn’t it?
Well let’s see. Is it really?
Because we can do another one.
We can go and look at gross margin instead.
So let’s change that. Let’s go down to gross margin, add some decimal points in
so we can see it in more detail and take a look at the numbers at the gross margin level.
So this is our ratio of profit to sales. And now its not so good.
The year started pretty well but over the last quarter or so something is going wrong.
We’re suddenly losing significant gross margin.
So although we are turning over more sales, our costs are going up disproportionately against that.
Sales are good, profit is much better but where we are is in a place where we could be making more money.
Because we’re making more sales but something is going wrong with that.
Again, because we have all this data sat behind something that we can get the software to do all the work for us
lets go back to that December figure and let’s drill into it and have a look at some more detail at what’s happening in the December numbers.
So this report is a report that, for each of our customers in the business, gives us all of the numbers for that customer.
So we’ve got our turnover, we’ve got what was the actual cost and therefore the profit;
we’ve got gross margin and we’ve got some target information too.
Now I’m going to scroll it up in a second but in this column here where the gross margin is,
Octelas also has some little coloured markers that help you to spot gross margin figures that are perhaps outside of the norm.
so if it’s a particularly good one and we’ve got one here at the bottom then we get a little green arrow.
So that’s good, we’re making more profit there.
But if its bad, it goes red and it goes downwards.
So if we sort that column by the gross margin so we’re now looking at the low gross margin stuff at the top
and we scroll up to look at some of these other customers.
We’ve got a whole host with that red indicator.
The highlighted ones are showing about 10% margin and this business typically does 16 or 17 %
so what’s going wrong with all those customers.
Why are we suddenly losing margin in all those places?
We can drill down further and now we can really get into the actual transactional detail right at the bottom of it and have a look.
Here’s the detail of those transactions.
Again, lets sort by the gross margin so we can see the low stuff
and when it zooms up here you can see, here’s the real, actual problem that we’ve got.
So for that particular customer in December we sold 6 items where we spent more buying it than we sold it to them for.
We have a gross margin which is negative.
When you’ve got large quantities of sales and so on, large number of customers, whatever,
pricing things that go wrong somewhere can lead to this kind of information being utterly hidden.
Remember, our turnover was up, our gross profit was up. Happy Days.
But we’re missing it.
We’re losing, in that top 6 items there, remember there were loads on the screen before,
there’s £250 that didn’t come our way that should have done, just to break even, let alone the actual profit.
So we’re probably losing in that one customer hundreds of pounds worth of sales.
And that’s the power of having this kind of technology available to really look at these numbers for you.
Also talked about the fact that you can look at these gross margin figures by any number of different metrics.
Because the data’s there, it’s really quick and easy to go in so we can go back and grab that gross margin in any different way,
so let’s go in and look at it for example by sales area.
So rather than looking at all of our customers, let’s group it up a bit higher and see if we can find the other patterns.
So here’s our 11 sales areas across the country. We can see that we have a nice standard, everything rosy for our gross margins
except for the top one. Something’s rotten in the state of Birmingham!
In this particular month, Birmingham’s only doing 14%. What’s going on?
Maybe that’s where the actual issue is?
We can drill down into that, go and talk to the manager there and really find out what’s going on.
Now you’re probably thinking that I’ve massaged my demo data a bit to be able to make this point for you.
And you’d be right. I did!
However, what I have to tell you is that in just about every company that we’ve put this technology into
and we’ve given the business owner the ability to look at
gross margin by customer which they’ve never seen before,
within days there’s been a “Oh, what’s that one? Why have we got a red arrow down there?”.
Literally, every company we’ve worked with, we’ve found instances where they’re selling goods well below margin
or like that one, actually at a loss. And it was there, hidden in plain sight all the time.
So it’s a very common thing and its just “lost money”. It really is.
So if you would like to get to this level of detail on your profitability then do take a look at the illuminis business intelligence solution.
Our offering to SMEs is unique: for a single monthly fee we give you a one stop shop for SME reporting, combining excellent, easy to use software with specialist advice and support which is always on tap.
I’d love to give you a quick demo and show you how you too can have the reporting you need, at a level you really didn’t think possible at this price.
Email me or visit our website and get in touch. Thank you