Do you really want to understand where you make money? Then you need to change perspective

Theory and practice

Once you have started reading COGS and margins, the next level follows: understanding how income is generated. And this is where many companies go wrong, because they do not know which way to turn.

Cost accounting, which determines the costs and revenues for each job order, is not always the best choice.

Let’s take a real case: a company that processes stainless steel to customer specifications.

The objective is clear: to understand profitability. But how? There are two routes:

• analyse each individual job order;
• analyse the individual processing phases.

The first seems more intuitive but be careful: if there are many job orders, the risk is creating a system that is complex, costly and of little use.

Why controlling only works when the benefits outweigh the costs. And this is where the change of mindset comes in: if prices are built on processing operations, then the real focus is not the job order. It is the phases: cutting, finishing, specific operations. These are what generate costs and margins, and this is where you need to look, without wasting time on cost accounting.

So what is needed? Determine the average hourly production cost, outside the accounting system. Track actual processing times. Link each phase to consistent units of measure (m², kg, metres, etc.).

Tools such as an MES and barcode-based progress tracking systems help, but the point is not the technology: it is the method.

When you start comparing selling prices (€/m², €/kg…) with production costs (time × hourly cost), something powerful happens, because you understand exactly where you are making money, where you are losing it and where to take action.

And that’s not all: if you link production and customer (MTO logic), you can arrive at a twofold analysis of profitability by process and profitability by customer. And this is where uncomfortable truths emerge, because not all processes are profitable, and neither are all customers. But without this level of analysis, they remain invisible.

When information is collected and analysed correctly, operational decisions also become faster and more effective. The company can understand more precisely where to focus investment, which processes to optimise and which activities require immediate action to improve overall profitability.

The real turning point comes when you stop looking only at the final result of the job order and start analysing the economic contribution of the individual production activities. That is when controlling stops being theory and becomes a concrete tool for improving margins and efficiency.

And the real questions become: are you analysing what is easy… or what is really needed to improve margins? Are you sure you are really in control of your company? How much is not being in control of the numbers costing you?