During a recent discussion with a client, we sense something is troubling the management team. A doubt about an important project.
We launch an analysis. Without cost accounting in place, the exercise is lengthy, tedious, and the results remain approximate. But the verdict is clear: this project, despite its substantial revenue, shows an operating margin of 10%, well below the company's usual margins.
Three findings emerge. First, without an analytical structure, this analysis should have taken a few hours, not a full day. Second, even after optimizing certain costs, the project remains dilutive: every franc it generates pulls overall profitability down. Third, this project consumes significant resources, ties up working capital, and increases risk exposure, without truly contributing to the company's strategy, except for the growth aspect.
This is not an isolated case. It's a situation we regularly encounter in Swiss SMEs: management by gut feeling, revenue growth as the top priority, weak or non-existent cost accounting, and a tremendous effort required to understand what's happening and explain performance, whether to management, the board of directors, or simply to shareholders and entrepreneurs.
Revenue Growth Without Visibility: The Classic SME Trap
"More revenue, more profit." This equation seems obvious. Yet it deserves to be nuanced.
Growing means first growing with your market. If your sector grows by 5% and so do you, you're maintaining your position. If you grow faster, you're gaining market share, and that's often a legitimate objective.
But growth also has its downsides. Growing means taking more risks: more clients, more dependencies, more operational complexity. It means tying up working capital, sometimes hiring, often investing.
The real question isn't "did we grow?" but "did we earn significantly more, and was it aligned with what we wanted to achieve?"
And to answer that question, you need to understand how your revenue increased.
When your revenue grows, the real question is: how did it grow?
- Through volume: you sold more units, took on more contracts, delivered more projects. But each additional unit consumes resources, time, purchases, sometimes new hires. Volume makes the company bigger, but not necessarily more profitable.
- Through price: you raised your rates or sold higher-value services. At equal volume, your margin improves directly. Price improves profitability without consuming more resources.
Most business owners know their total revenue. Far fewer can break down their growth between volume effect and price effect. And without this information, it's impossible to know whether growth is strengthening the company or weakening it.
General accounting tells you how much you earned. Cost accounting tells you how and where.
What This Situation Teaches Us About SME Management
Let's revisit this case. Why did this project seem profitable when it wasn't?
Because everyone was looking at revenue. Invoices were going out, the client was paying, the team was busy. All visible signals were green.
But beneath the surface:
- Direct costs had been underestimated in the initial quote
- Actual time spent far exceeded projections
- Additional purchases were accumulating without centralized tracking
The most revealing finding: even after our optimization work, even after reducing certain costs, the project remained structurally dilutive. At 10% margin versus 18% for the rest of the business, every hour invested in this project was costing the company profitability.
And this is where the concept of opportunity cost comes into play. The resources tied up in a low-margin project could have been allocated elsewhere, to more profitable activities, or simply avoided to preserve cash flow.
→ To learn more about profitability metrics, see our page on essential financial KPIs for SMEs.
Structuring Your Cost Accounting: The Three Pillars
Effective cost accounting rests on three fundamental elements. Each answers a different strategic question.
Pillar 1: The Service Catalogue, Know What You Sell and at What Price
Before knowing if a project is profitable, you need to know what you're selling. This seems obvious, but ask yourself: can you list your services with their unit price and theoretical margin?
Many business owners talk about "invoices sent this month" without being able to answer simple questions:
- Which service generates the most revenue per hour invested?
- Which offering has the best margin?
- How has the mix between your different offerings evolved?
A clear service catalogue allows you to manage your product/service mix and understand what's driving profitability up or down.
The critical issue: price revision.
A rate that hasn't changed in five years is a silent margin loss. Inflation, salary increases, tool costs, all of this erodes your profitability if your prices remain frozen.
The rule is simple: if you haven't become significantly more efficient (automation, productivity gains), a stable price means a declining margin.
A well-structured service catalogue, regularly updated and integrated into your invoicing system, is the foundation of any profitability analysis.
Pillar 2: The Supplier Catalogue, Know What You Buy to Deliver
What you sell is only one side of the coin. The other side is your purchases.
Every service you deliver consumes resources: subcontracting, materials, software, travel. Knowing what you buy to produce is just as important as knowing what you sell.
A structured supplier catalogue allows you to:
- Map your purchases by service type: how much does it really cost to produce each service?
- Strengthen your negotiating power: you can't negotiate what you don't measure. A supplier representing 15% of your purchases deserves an annual conversation about rates.
- Detect increases before they permanently impact your margin: if a key supplier raises prices by 8%, you need to know immediately, not at year-end when the margin has already melted away.
Too many companies absorb their suppliers' price increases without reacting, while hesitating to raise their own prices. This imbalance erodes profitability year after year.
Transparency on your purchases is the essential mirror of transparency on your sales.
Pillar 3: Analytical Dimensions, Choose What You Want to Track
Once your catalogues are in place, you need to define how you want to analyze your results. This is the role of analytical dimensions. Most entrepreneurs are used to seeing their sales by client; the following dimensions can be added (the most common):
- By activity: do you have multiple business lines or service lines? Measure the profitability of each, sometimes linked to your sales catalogue.
- By cost centre: do you want to track expenses by department, team, or location? Create cost centres and ensure you have managers for each cost centre who will monitor a budget and alert you to variances.
- By project: do you work in project mode? Track revenues and costs project by project.
The golden rule: start with ONE dimension that answers ONE strategic question.
If your main question is "which types of contracts are most profitable?", start with an activity dimension, distinguishing for example your B2B and B2C activities, then within each segment your verticals. Indeed, an analytical structure doesn't have to be flat, you can have groupings that allow you to aggregate your analytical dimensions. Then focus on cost centres, keep administrative costs under control and separate from operational activities, create a marketing cost centre, etc.
Wanting to measure everything from the start is the best way to end up with no usable data.
Limitations and Prerequisites: What You Need to Know Before Starting
Cost accounting is a powerful tool. But poorly implemented, it can do more harm than good.
The trap of excessive granularity.
The more dimensions and sub-categories you create, the heavier the system becomes to maintain. If your employees have to code each entry across five different dimensions, they won't do it correctly, or at all. An overly complex analytical structure generates inconsistent data and flawed analyses.
The risk of bad decisions.
A poorly designed analytical structure is worse than no structure at all. If your dimensions don't correspond to your real business questions, you'll make decisions based on irrelevant metrics.
The often-forgotten prerequisite: clean general accounting.
Before building analytics, make sure your basic accounting is reliable and up to date. Sophisticated analytical data built on approximate general accounting is worthless.
Warning signs:
- Chronic delays in accounting entries
- Bank reconciliations not done
- Mass adjustment entries at year-end
If this is your situation, start by cleaning up the foundation before adding layers of analysis.
Cost Accounting with Odoo: The Advantage of an Integrated ERP
Most SMEs that attempt to implement cost accounting do so with manually-fed Excel files. It's better than nothing, but it's fragile, time-consuming, and often obsolete as soon as it's produced.
The alternative is an integrated ERP like Odoo, where sales, purchases, projects, and accounting all live in the same system.
Concretely, this means:
- A customer invoice is automatically linked to a service from your catalogue, to a client, and to any other analytical dimensions
- A supplier invoice is attached to the project and/or activity it concerns
- Time spent by your teams can be allocated to the right projects
- Dashboards update in real time, without re-entry
You move from laborious quarterly reporting to permanent visibility on the profitability of your activities.
At DHAC, we support SMEs in this structuring. Our approach: build with you an analytical structure adapted to your decisions, not a theoretically perfect system that no one will use.
We always start with a simple question: what decision do you want to be able to make with this data? The structure follows from the answer.
First Step: Know Where You Stand
If you're reading this article, it's probably because you feel a lack of visibility on the real profitability of your activities. That's a good starting point.
The first step isn't to implement a complex system. It's to take stock:
- Do you have a service catalogue with up-to-date prices?
- Do you know what you buy to deliver each type of service?
- Can you answer the question "which project or activity was most profitable this quarter"?
If the answer is no to one or more of these questions, you've identified your starting point.
Want to know if your projects create or destroy value?
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DHAC supports Swiss SMEs in structuring their accounting and implementing Odoo. Our approach: solid foundations first, growth second.