Revenue fell and your costs did not. How do you see it three quarters early?

There is one signal in your management accounts that fires months before anything else, and almost nobody looks at it. It is not a cost that rises. It is a cost that fails to fall.

#The example

Q1 at a trading company, outsourced logistics across four contract lines:

                        actual     budget    variance
revenue                414,400    765,400      -45.9%
logistics total         99,300     93,700      +5,600
as % of revenue          24.0%      12.2%

In euros that is €5,600 over budget on nearly a hundred thousand. Nobody loses sleep over it. The variance column is close to green.

But revenue came in 46% under plan and the bill stayed put. As a share of revenue the line nearly doubled. At the budgeted ratio it should have been €54,300 instead of €99,300.

That is €45,000 in a single quarter, and it was sitting in the March figures. The annual accounts would have told you the following spring.

#Why you cannot see it

Every reporting package shows budget against actual in euros. That is exactly the view in which this is invisible: a contract that does not move with volume lands on budget, because the contract is what was budgeted.

The ratio to revenue appears in no standard report, and it is the only place this shows up.

#The test

For each cost you would expect to move with volume:

1  the line as a percentage of revenue, now and last period
2  how far that percentage moved
3  how far the amount itself moved
4  ratio moves hard, amount barely moves
   -> the contract is the problem, not the spending

If both move hard, it is an ordinary overspend and your accounting package has already told you.

#Do not run it over everything

This is the trap, and we walked into it ourselves while building the rule.

During a 46% revenue fall, every fixed cost drifts as a percentage. Payroll in the example above went from 21.9% to 36.1% of revenue. Run the test over it and it confidently reports that wages are €58,600 too high.

They came in €18,400 under budget.

So: only over costs that ought to be volume-variable. Outsourced logistics, freight, commission, packaging, payment fees. Not payroll, not rent, not insurance.

And if nearly all your tested lines fire at once, you do not have six findings. You have one, and it is about revenue rather than contracts.

#What to ask once you have it

Not "can this be cheaper". Four questions, in this order:

Split the lines into fixed and variable. What do I pay when the units are zero.

Is there a minimum commitment. If yes, you know immediately that part of it is unreachable and you stop chasing it. If no, the invoice is simply wrong and this is a correction, not a negotiation.

Ask for a rate card with volume bands instead of a flat rate. With volume that can miss plan by 46%, a flat rate is the wrong instrument for your supplier too.

Offer something in return. A longer term against a more variable rate is worth more to a service provider than a discount argument.