Customer Income Statements
There are some key characteristics of a typical manufacturing supplier’s P&L (or income statement) when compared to a customer’s P&L, demonstrated in this example:
Manufacturer |
% |
Customer |
% | |
| Revenue | 100 | Revenue | 100 | |
| Cost of Sales | 68 | Cost of Goods | 81 | |
| Gross Profit | 32 | Gross Profit | 19 | |
| Selling & Distribution | 11 | Supplier Income | 7 | |
| Contribution Profit | 21 | Adj. Gross Profit | 26 | |
| Admin Expenses | 9 | Store & Other Overheads | 23 | |
| Operating Profit | 12 | Operating Profit | 3 | |
| Other | 0 | Other | 0 | |
| Net Profit before Tax | 12 | Net Profit before Tax | 3 |
This brings to life the principle we have just looked at – that different businesses create value in different ways:
- A manufacturer will tend to have higher margins and lower asset turns. Note that a typical manufacturer enjoys higher margins when compared to a customer
- A customer will tend to have lower margins and higher asset turns. Most of our customer’s assets are held in inventory/stock “Cost of Goods” – here stock accounts for 81% of all our customer’s assets. You can see how stock turn becomes so critically important to our customer.
This is at the heart of how we approach all financial discussions with our customer:
At lower margins, our customer must efficiently turn over his assets as much as possible, in order to make a profitable return.