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Strategic Optimisation: A CFO’s
Guide to Pricing, Margins & Inventory
6. Accounts Receivable Levels – Number of
“Days Sales Outstanding” from customers
(DSO).
- Receivables/Average Sales (including GST) of
the last 90 days
This article explores the optimisation of
pricing strategies, gross margins, and inventory
management and control, demonstrating how
strategic oversight in these areas can drive
profitability and enhance operational efficiency.
Rajangam Ramasubramanian By mastering these control points, CFOs can
empower their organisations to achieve
Principal - CFO Centre India/Mumbai sustainable growth and confidently navigate the
rajangam.ramasubramanian@cfocentre.com manufacturing landscape’s complexities.
To determine the optimum selling price,
In the competitive realm of manufacturing, six two factors take precedence:
essential control points act as vital indicators of
business growth and success. These include top 1. Costing based on Bill of Materials Valuation
line revenue, gross margins, net margins, finance 2. Desired Gross Margin
costs, inventory levels, and accounts receivable
levels. Each element significantly influences the Bill of Materials (BOM) Valuation
overall financial performance of an organisation. Bill of Materials (BOM): A BOM is a detailed
list of all the raw materials, components,
1. Top line – Revenue – Net of GST and as per the assemblies, and sub-assemblies required to
Revenue Recognition Policy of the company. produce a finished product. It includes quantities
a. For Sale of Goods: when it is delivered, and title and costs associated with each item.
& control to the goods are transferred.
b. For Services: Recognised over timelines and/or Valuation:
milestones as mentioned in the contract. • Direct Material Costs: This is the cost of all the
2. Gross Margins – Revenue less - Cost of Goods raw materials and components listed
sold (Variable & Direct costs) in the BOM. It includes the purchase price,
a. Cost of Goods sold means all costs incurred to shipping, and handling costs.
bring the goods to the “state” required as per • Cost Calculation: To value the BOM, you sum
design and contract or “location” stipulated in the up the costs of all components that
contract. have been finalised as per the Final Drawing and
3. Net Margins – Gross Margins less Selling & Design accepted by the customer.
Administration Costs • Variations: The BOM valuation can fluctuate
a. Selling & Administration Costs means Salaries based on changes in material costs,
& Benefits, Rent, Marketing and other supplier pricing, and manufacturing conditions.
administrative expenses.
4. Finance Costs – Interest on Bank limits, Term Gross Margin
Loans and other Secured & Unsecured Loans Gross Margin: Gross margin is a key financial
5. Inventory Levels – Number of “Days of metric that indicates how much money a
Supply” in Inventory (DOS) - Inventory/Average company retains from sales after covering the
consumption of last 90 days.
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