Knowing your true costs is essential for any business to measure its profitability. Further to this, if you are only capturing the supplier invoiced costs of goods in order to measure Gross Margin then you could be missing the true Cost of Goods.
Consider the following scenario:
An item is purchased from a supplier at an Invoiced price of $1000. You then sell it for $1900.
This makes the Gross Margin for the Item 47.37%
Gross Margin % =
$1900 minus $1000 = $900 (This is Gross Profit)
$900 divided by $1900 = .4737
.4737 Multiplied by 100 = 47.37%
Hmmm, that’s a pretty good margin, however if we were to look at the bigger picture.
Let’s say it cost you a further $250 to land this item into your store allowing for Freight, Insurance, Duty etc. Therefore the ‘landed cost‘ of the item should be $1000 + $250 = $1250 not $1000
Now what would the margin show….. 34.21% This is your ‘True Margin‘
There are many ways of spreading Landing Charges across the value of goods on a shipment. eg: Qty, Value, Duty %, Volume and Weight. It all depends upon the types of goods you are purchasing.
Typically, if the landed costs are calculated by businesses the exercise of spreading these charges is done manually or via a spreadsheet. This can be cumbersome and complicated to use.
Ostendo Operational Software offers a purpose built Landed Costing module as standard functionality. This allows you to spread unlimited shipment charges (of varying currencies if required) using any of the above methods.
In summary, knowing your true landed costs of product is essential in determining profitability. Without including or allowing for these costs , you could be fooling yourself into thinking a product is more profitable to you than it actually is.
For more information on any of the above please contact BIZINFO