Utilizing Profitability to Drive Business Decisions

Early on in my first corporate job I was asked to take over the annual product profitability analysis. It was performed done in Lotus 1-2-3 by manually adding revenues, expenses, and activity drivers (or spread measures). It was laborious process that provided limited insights into the organization.

We eventually automated it into a new system with the ability to deliver results across the entire organization. We wanted to understand what the key business drivers were driving profitability. We were able to see things such as break-even price points, contribution margins, and capacity.

Any organization going down this road should consider the following aspects before they begin measuring profitability:

• Items to Measure – This is related to what decisions are you trying to derive from the profitability analysis. It could be focused on things such as products, customer segments, or organizational segments. This impacts everything in developing profitability analysis.
• Explainability – Are you able to articulate it in a straight-forward manner? Management should be able to understand the results and how to utilize it for decision making. It is too complex if it takes a PhD in mathematics to explain it.
• Frequency – How often to you need to produce the results? Monthly? Quarterly? Annually? Or is a one-time event to understand some event at the organization? You may need results frequent enough to adjust the organization or drive accountability. You need to get out quick enough to allow decisions to have impact.
• Method and Ability to Repeat – Can you repeat the process? One-time studies can turn into ongoing requests by management. You need to be able to capture the required data (financials, drivers, and attribution for analysis) and have methods that minimizes human estimates or judgements.

These considerations should create a framework of how you will measure profitability. When structured properly the results should reveal the key drivers of an organization’s financial performance. Management needs to use them to drive decisions and hold organization accountable for financial goals.

Financial Performance Consulting can help you develop a process to measure your organization’s performance. This will help you drive business decisions. Please contact us to hear how we can help you understand your key business drivers.