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profitability_primer

Understanding Profitability

Profitability on sales in System Five starts from the category setup. During the category setup the 3-digit category code will determine the ledger codes for Income and Cost of Goods sold. The cost of the goods is set from the cost of the product brought in from during the PO receiving. During invoicing, the cost of goods is brought into the invoice as well as the retail price. The difference between these selling prices and the cost prices will determine the profitability.

Profitability calculation begin with the category setup which can be accessed through Setup Tools → Configuration → Category Setup.

Figure 1 shows a Main Category Setup with the ranges of Sub categories.
Figure 1 - Category setup screen
Figure 1 - Category Setup Screen

The three digit category will dictate the Income and Cost ledgers. The default setup as show in Figure 2 will prefix a 4 to your category number for the income account and prefix a 5 for the cost of goods sold account.
Figure 2 - Subcategory setup screen with ledger codes
Figure 2 - Subcategory Setup Screen

The inventory cost is determined by the landed cost defined in the received purchase order. System Five uses a FIFO (First In First Out) method of selecting the next item sold. When selling stock from the example in Figure 3, the stock from the first 5 items at the top of the list will be sold first. The amount of $99.495 will be deducted from the inventory holding account (Default 1200) and moved to the Cost of Goods sold account (5xxx where xxx is the 3 digit category number) during the invoicing.

Figure 3 - Inventory Stock and Cost Levels
Figure 3 - Inventory cost and stock levels

The List price for the item sold will be posted to the income account for that item category (4xxx where xxx is the 3 digit category number). The journal entry showing the invoice transaction can be displayed while in the invoice. Use the Options button on the invoice followed by Invoice Options then Edit Single Transaction. The results will be displayed as in Figure 4.

Figure 4 - Invoice ledgers
Figure 4 - Invoice backend report showing account postings

In the Figure 4 example, the Cost of Goods sold are coming from Categories 130 and 220 . The total cost of the inventory sold are taken from the 1200 inventory account. The markup is applied giving us a list price which is posted to the 4130 and 4220 income accounts. The tax amount is added to the amount posting to income which is then applied to the Accounts receivable account.

The profitability can be determined by subtracting the amounts in the 5000 accounts against the amounts in the 4000 accounts. In the Figure 4 example the light is costed at $75 then sold at $172.50 giving a profit of $97.50.

Profitability Reporting

A profitability report ships with the default install of System Five. It is accessed through General Ledger → Ledger Reports → Profitability. This report calculates profitability by taking the difference between the Income and Cost accounts for each category and generating a percent profitability.

The invoice report found under Reports → Sales Reports → Customer and Invoice Sales Reports → Invoice report will generate a list of invoices based on the settings on the report. The profit analysis selection can be included to add a column on the report for a dollar difference and a percent on margin calculation.

Profitability Tour Video

For an overview of System Five profitability use the link to the video below.

Profitability Tour Video

profitability_primer.txt · Last modified: 2011/03/23 12:54 by andrew