Check margin, stock and cash
Why margin, stock and payment dates need checking together before approval
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An equipment distributor receives an order worth €1,000. The recorded cost is €760, all owed to the supplier, leaving a margin of €240. But if the company pays the supplier on day 10 and the Customer pays on day 30, it must cover €760 for 20 days. This example shows why margin, stock and payment dates need checking together before approval.
Three checks before approval
Margin: Does the order meet your margin floor, the lowest margin you accept without the Owner's approval?
Stock: Can the warehouse that will ship the order meet the promised delivery date?
Cash: Can you cover the gap between paying the supplier and being paid by the Customer?
1. Check the margin before agreeing to a discount
Use the proposed price and the known order costs:
Step 1: Enter the costs. Include the purchase cost and any known freight, installation, payment fees or other costs of fulfilling the order.
Step 2: Calculate the margin. Subtract those costs from the selling price. Divide the result by the selling price to get the margin percentage.
Step 3: Compare it with your margin floor. Check again if the price changes.
On the example order, a €100 discount has this effect when the recorded cost stays unchanged:
Illustrative order price | Recorded cost | Margin, € | Margin, % |
|---|---|---|---|
Proposed: €1,000 | €760 | €240 | 24% |
Discounted: €900 | €760 | €140 | 15.6% |
The price decision: A €100 discount reduces the margin from €240 to €140 and may take the order below your margin floor.
Missing costs make the margin look higher. Agree which costs to include before setting the floor. This is the margin on one order; net profit also accounts for the business's other expenses.
Measure: Orders approved below your margin floor, with the reason for each exception.
2. Check the warehouse that will ship
An item may be in stock somewhere in the company but unavailable for Friday's delivery. Check the location that will fulfil the order:
Step 1: Find the item. Check which warehouse holds it and whether it is already committed to another order.
Step 2: Confirm the quantity. Compare the recorded stock with what is on the shelf.
Step 3: Confirm the delivery date. If the item must be transferred or purchased, allow for that time before promising it to the Customer.
Equipment information for a combine: 11 units in total, 10 at Central Distribution Center and 1 at Global Supply Depot. Sample data in the PowERP demo company.
APQC defines inventory accuracy by comparing recorded stock with a physical count. Start with a small group of fast-moving items at the shipping warehouse. Record any differences and repeat the count after changing the process.
Measure: Share of counted items that match the record, at the warehouse that ships the order.
For late deliveries, record the cause. A supplier delay and an incorrect stock record need different fixes.
3. Check when the cash moves
On the same example order, the supplier is paid before the Customer pays. Assume both payments arrive on time, the goods were bought for this order and VAT is excluded:
Day from order date | Who pays whom | Amount | Net cash from this order so far |
|---|---|---|---|
Day 10 | Distributor pays supplier | €760 | −€760 |
Day 30 | Customer pays distributor | €1,000 | +€240 |
The cash decision: The company must cover €760 for 20 days. If the stock was paid for before the order arrived, the cash was tied up earlier.
Check whether the business can cover that gap:
Step 1: Add both payments to the cash plan. Use the expected supplier and Customer payment dates.
Step 2: Check the other payments due. Several supplier bills may fall due before the next Customer payment arrives.
Step 3: Find the lowest projected balance. If it is too low, review the payment terms before approving the order.
Measure: The lowest projected balance in the planning period, and the gap between forecast and actual receipts and payments.
Make the checks part of approval
Use one rule for every order:
Approve: the margin meets the floor, the shipping warehouse can meet the delivery date and the cash plan covers the payment gap.
Refer to the Owner: a check fails. The Owner decides whether to approve an exception and records the reason.
Review monthly: check the exceptions and compare the measures with their starting values.
The first article in this series, What should ERP change in your business? Seven goals you can measure, explains how to choose your goals and record those starting values. This article applies its margin, stock and cash goals to one order.
