Answer these questions before you read on
Commit to an answer before you open each one. Together they show where the problem is.
1Which is your best-selling product, and what does it earn after freight, discounts and credit?
Best-selling and best-earning are rarely the same product.
2Which customer takes the most of your time and the longest credit?
Often the biggest customer is the most expensive to serve.
3Do you cost a 2-minute part the same way as a 20-minute part?
Percentage costing does, and it hides which parts lose money.
4When did you last stop selling something because it didn't pay?
Most businesses only add products, never remove them.
5If one customer left tomorrow, would profit go down or up?
Sometimes up.
Profit is decided product by product and customer by customer. The total just adds them up.
Contribution: the number that ranks your products
Contribution pays for your fixed costs and your profit. Rank products and customers by contribution, and by contribution per hour of your scarcest resource: machine time, staff time or working capital.
Work out the real margin on a product or order
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Check you've counted every cost
- Discounts and schemes, not list price.
- Freight, packing and commission.
- Rejections, returns and rework.
- Machine or staff hours actually used.
- Credit days at your borrowing rate.
- Special handling and small-order costs.
Six businesses, six versions of the same problem
The same problem looks different in every industry. Pick the business closest to yours:
These are composite businesses with illustrative figures, built to show how the method works. They are not CFOSurge client results.
Distributor, ₹45 crore turnover
The numbers (₹ lakh, illustrative)
| Line A: share of sales | 25% |
| Line A: share of contribution | 40% |
| Line C: contribution after credit | negative |
| Lines to act on | 1 of 3 |
The diagnosis
Line C's long retailer credit wipes out its margin.
The full solution, in order
- Shorten credit on line C or drop slow retailers.
- Push lines A and B.
- Review quarterly.
Don't do this
- Judging lines by turnover.
Numbers to watch every month
- Contribution by line
Component maker, ₹38 crore turnover
The numbers (₹ lakh, illustrative)
| Auto range: contribution per machine hour (₹) | 1,800 |
| Custom range: contribution per machine hour (₹) | 5,400 |
| Gap per bottleneck hour (₹) | 3,600 |
The diagnosis
On the bottleneck CNC, every hour on the auto range costs ₹3,600 of contribution.
The full solution, in order
- Raise price or MOQ on the bottom 20 parts.
- Prioritise custom work on the bottleneck.
- Quote new RFQs on machine-hour cost.
Don't do this
- Pricing by weight or percentage.
Numbers to watch every month
- Contribution per machine hour
Garment exporter, ₹60 crore turnover
The numbers (₹ lakh, illustrative)
| Buyer X: share of sales | 35% |
| Buyer X: margin after claims and credit | 3% |
| Buyer X margin | 3% |
The diagnosis
Claims and 120-day payments erase the margin.
The full solution, in order
- Renegotiate claims terms.
- Move to LC.
- Diversify buyers.
Don't do this
- Accepting every order from the biggest buyer.
Numbers to watch every month
- Margin by buyer after claims
Chemicals maker, ₹80 crore turnover
The numbers (₹ lakh, illustrative)
| Molecule P: contribution per batch (₹ lakh) | -1.2 |
| Molecule Q: contribution per batch (₹ lakh) | -0.6 |
| Loss-making molecules | 2 |
The diagnosis
Yields are below the costing standard, so the price list is wrong.
The full solution, in order
- Fix yield or reprice.
- Cost by actual batch records.
- Stop if neither works in a quarter.
Don't do this
- Using standard yields in pricing.
Numbers to watch every month
- Contribution by batch
Contractor, ₹25 crore turnover
The numbers (₹ lakh, illustrative)
| Government jobs: margin | 11% |
| Government jobs: days to cash | 160 |
| Private jobs: margin | 9% |
| Private jobs: days to cash | 60 |
| Better per rupee tied up | Private |
The diagnosis
Per rupee of working capital, private jobs earn far more.
The full solution, in order
- Rank jobs by return on working capital.
- Price government tenders for delay.
- Balance the order book.
Don't do this
- Chasing size over return.
Numbers to watch every month
- Margin and days to cash by job
IT services firm, ₹12 crore revenue
The numbers (₹ lakh, illustrative)
| Client A: share of revenue | 20% |
| Client A: share of effort | 30% |
| Client A margin | lowest |
The diagnosis
Scope creep and discounts make the biggest client the least profitable.
The full solution, in order
- Reprice at renewal.
- Track effort against scope.
- Charge for change requests.
Don't do this
- Giving free work to big clients.
Numbers to watch every month
- Effort vs revenue by client
Hover over a business for a preview (tap on a phone), then click to open the full case.
What to do with each group
| Group | Action |
|---|---|
| High contribution | Protect, prioritise capacity, grow |
| Average | Improve costs and terms |
| Low | Reprice, set minimum orders, shorten credit |
| Negative | Fix within a quarter, or stop |
Make it part of the monthly MIS
- Contribution by product and customer every month.
- Flag anything below a threshold.
- Review prices quarterly.
- Cost every new product or order before accepting it.
Mistakes to avoid
- Allocating overheads as a percentage and calling it product cost.
- Ignoring the cost of credit.
- Keeping loss-makers 'for volume'.
- Dropping products without checking shared costs.
- Pricing new orders on old costs.
Official sources and guidance
Rules, rates and thresholds change. Check the current position at these official sources before acting.
- GST portalReturns, GSTR-2B and input tax credit
ReferenceKey terms in plain English
4 terms
- Contribution
- Price less direct costs; what each sale contributes to fixed costs and profit.
- Machine-hour costing
- Costing products by the machine time they use.
- Cost to serve
- All the costs of serving a customer, including credit, freight and support.
- MOQ
- Minimum order quantity.
Questions owners also ask
How do I calculate product-wise profitability?
Take the net price after discounts, subtract every direct cost (material, labour or machine time, freight, commission, rejections) and the cost of the credit the sale takes, then rank products by the result.
Should I allocate overheads to products?
For decisions, rank by contribution first. Allocated overheads can mislead, because most overheads don't change when you drop one product.
What should I do with loss-making customers?
Reprice at renewal, shorten credit, set minimum orders or charge for extra service. If none works within a set period, stop.
Want a CFO to work through this with you?
If you'd like contribution worked out across your whole range, A CFOSurge CFO can go through it with you using your actual numbers.
- Plans from ₹50,000 a month, fixed after a free assessment
- Free consultation with a senior CFO
- No cost, no obligation
- Pay nothing if you don't see value in the first 2 weeks