In the blizzard of advice to managers about balanced scorecards, key performance indicators, budgeting and target-setting, it is striking that perhaps the most important measure of all is omitted: net margin.

Gross margin is easy to calculate: revenue minus direct costs. For many businesses, this is a lethally irrelevant measure. It’s what erodes gross margin that matters. Which products and services attract the highest overheads?

More importantly, which customers impose the highest overhead costs? These questions are important because even in manufacturing companies, direct materials and labour typically account for less than 60 per cent of total costs. In the service sectors, around three quarters of costs are what we describe as ‘overheads’ or ‘indirect’. It is vital that companies understand how these costs are driven, in order to determine which products, services and customers are truly profitable and which are not. Experience shows that often the results are surprising to management and in contradiction with their expectations on profitability.

Knowing the true picture on product and customer profitability opens the door to substantial profit improvement.

CostPerform is the right tool to assign the indirect and overhead cost as well as direct cost and have an integral view on cost and revenue on a product and customer level.