This is a part of a report. Write 400-500 words on How does the business undertake customer profitability analysis? The objective is the small business, Double K UC. Essay Example

Customer Profitability Analysis

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How business undertake customer profitability analysis

Customer profitability analysis is the process of analyzing all the revenues earned from a specific customer or group of customers from the time goods and services have been received from the manufacturer until the time of delivery (Lecture notes). It is also a process on how to determine whether the company is profitable or not. Customer profitability analysis should be made after certain duration or according to the company’s calendar to enhance ease of calculating the profit or loss made by the company. This paper will look on how small business undertakes customer profitability analysis.

The following are the steps on how small business undertakes customer profitability analysis. First is, deciding on the time period of the customer. Before starting calculating the customer profitability analysis, company should decide on the period of calculating the profitability analysis. The period chosen should depend on the quantity and how frequently the customer buys. The period can be monthly, annually or lifetime. After which the company should check the account records and analyze all the revenues associated with the particular customer (Lecture notes).

Secondly, is to determine all the direct cost associated with that particular customer. These are those cost which varies with the level of sales made by the company. They include direct raw materials, direct labor, transportation fee and sales commission associated with the goods and services offered by the company. After the company has determine both the revenue and direct cost associated with that particular customer, then the next step is to identify the gross profit or loss made by the customer. This is getting the difference between the revenue generated and the direct cost made by the customer after which the result generated can be the gross profit or the gross loss.

Thirdly, is making an allocation for the contribution to the fixed overhead costs. These are those costs which do not change with the level of sales in the business. They include insurance of the company, interest made, machinery maintenance, advertising and monthly payment for security guards. A company should wisely calculate the fixed costs before finalizing the selling price of the goods since the fixed cost will determine the profitability analysis of the respective customers. Business people are greatly advised to choose an allocation that suits their goods and services and to make sure the revenue associated with each customer should be higher to enhance the profitability of the business.

Lastly, is determining the profit or loss made from each customer. After the business has accurately done with all the steps mention above, then the profit or the loss made can now be evaluated by subtracting the allocation overhead costs from the gross profit or loss made from the previous step. A business should always focused and emphasis on making profit for the sustainability of its growth.

From the discussion, it is clear that the paper has look on how small business undertakes customer profitability analysis and it is seen that for the business to be profitable, the revenue generated from each customer should be higher compared to all other delivering costs and also it should aim at making profit for its growth.

References List

Lecture Notes. CPA Notes week 15. University of Canberra