WHITE PAPER: The Value of Automated Landed Costs Calculation
“Average Costs
are simply not
enough for an
importer”
“Double entry
commonly results in
human error and
inefficiency.”
With Importing in the United States
becoming a universal business practice,
it has become increasingly more
important to understand how to become
profitable in this business and how to be
sure you stay profitable.
Competition is growing and margins are
shrinking. Importers need to know what
is affecting their ability to profit on
every transaction so they can maximize
profit on every shipment they bring in.
As a US based importer and distributor
you need to be asking yourself the
following questions:
• Is my business making a profit?
• How do I know if I’m profitable?
• Where can I cut costs?
• How do I increase revenue?
Traditional accounting systems offer the
ability to track profitability by
calculating an average cost at the
product level (for a given time period)
and matching that against an average
sale price for the same period. This is an
excellent method if you buy and sell
goods domestically because costs may
not vary very much from one transaction
to the next and an average of those costs
can give you an accurate enough picture
of how you are doing. For an importer,
averages are simply not enough.
Costs vary on a per shipment basis based
on fluctuation in duty rate, shipment
charges based on distance, fluctuation in
exchange rates, and dozens of other
costs. For this reason, averaging these
out does not give us an accurate picture
of which transactions are making money
and which are not.
Landed Costs
The most common method for importers
to measure profitability is called the
“landed cost” method. This refers to
keeping a running tally of all the costs
associated with importing the goods
including:
• Materials
• Duty
• Freight
• Insurance
• Loading
• Unloading
• Customs Broker Fees
• Refrigeration
• Warehousing
• Taxes
• Surcharges
• Bank Fees
• Inland freight
• And many others
These costs are commonly calculated on
Excel® spreadsheets outside of the
importer’s accounting system and then
re-entered into the accounting system as
Accounts Payable.
Automating Landed Cost Calculation
Using an importer specific system, all
inventoriable costs are entered once into
the system and tracked at the “venture”
(a specific product within a shipment)
level. Costs such as freight are entered
once and applied towards all products
enterprise software for importers
“Actual Profit
now available
for every
transaction”
within the shipment using one of many
possible “cost distribution methods”
including:
• By weight
• By quantity
• By value
• By volume
• By accrual (auto-fill)
• By weight
• Equally
• Manually (or open)
• By percentage
• Custom distribution methods
This information can then be viewed on
a per transaction basis or can be reported
on to supply information about gross costs by cost type, etc.
This information is invaluable because it
allows importer’s to make informed
decisions about which vendors to use, as
well as a wealth of related information.
Knowing Your Costs
Before They Come In
In addition to knowing your actual costs
as they come in, it is critical to be able to
estimate your costs so you can begin
selling goods at a price that allows for
profit before the goods are received. To
do this, the importer will need estimates
or accruals of the largest costs associated
with the transaction. Typically these
accruals will include: material, duty, and
freight although, depending on the
industry, there could be some significant
other expenses that make up the total
cost.
It is critical that users be able to create
these accruals. As bills come in from
the vendors, the actual costs are entered
and the importer is able to see an ever
more increasingly accurate cost of the
associated shipment. This allows the
user to start making informed decisions
about costing before even the first bill
comes in.
Measuring Profit
Although significant, costing is only half
of the story when looking at profit/loss.
Unfortunately for importers, until
recently, the idea of getting actual
profitability analysis (per transaction)
was only theoretical. Standard
accounting systems do not allow for“unit level matching”, meaning, once
goods are received they are put into
inventory losing all of the associated
costing information. Then, when goods
are sold, they are pulled from inventory
where, at best, you may get the material
cost (or average cost) which is marked
up and sold, hopefully for a profit. All
other costs are viewed by the accounting
system as overhead.
The new wave of importer specific
enterprise systems have revolutionized
this industry by matching a sale with the
specific units in inventory (in transit, on
hand, or at source). Those units carry
with them the latest projected cost of the
unit as well as all of the logistics and
documentation associated with that
specific inventory (see
http://www.viscosoftware.com/secondary
/product.htm). By comparing the sale price
with the landed cost (or latest projected cost),
the system is providing true profitability
analysis.