Profitability and cost analysis moves beyond traditional cost and profit centre reporting. It supports the company in strategic investment/rationalisation decisions as well as optimising ongoing income and costs.
Major organisations sell and service a range of products and services to a diverse mix of products.
Such companies must understand the real cost and profitability of sales activities, and avoid being too simplistic in their approach. Without a mature understanding the business leaders cannot make informed decisions to steer the performance of the organisation.
Profitability and cost analysis is carried out to:
- provide strategic insight
- inform key decisions such as pricing thresholds
- decide which products to promote or retire
- strengthen and segment customer relationships
- inform investment decisions to reduce process/channel cost
- drive improved customer experience
These decisions require insight, consideration and time to implement.
They should be supported by a clear baseline against which to measure performance improvement.
In the dark
Without profitability and cost analysis management is in the dark. One analysis showed 20% of a company’s branches were delivering 60% of the profits and 20% of customers were not even profitable. Before the analysis was carried out management had not known that. It could not take action.
Decision making requires granularity
The survey reveals:
- 85% carry out analysis on cost and profitability
- 32% says that profitability and cost analysis is available for distribution channels
- 46% say profitability and cost analysis is available for customers
- And 83% say traditional profit and loss reporting aligned to the organisation structure is the primary basis for profitability and cost analysis
- 66% said apportionment was used as the basis of allocation of shared costs. A driver based-approach would provide a more accurate and informed picture.
But organisational structures will not provide an effective basis for profitability and cost analysis. Why? Because those structures do not provide enough granularity over the key decision making dimensions.
"The aim of profitability and cost analysis is to inform business decision making with a view to systemically optimising profitability and ultimately shareholder value."
Insight, model, structure
To improve Profitability and Cost Analysis concentrate on three areas:
Depth of insight
Companies must understand what products/services are sold to whom, how and where; be clear on customer and channel profitability; have clear, end-to-end models and methods for analysis; and ensure cross-function and stakeholder engagement.
The data model - driven by a specialist software tool - needs to align to the needs of the business and finance; remain relevant: reviewed in the annual strategic planning cycle or in response to triggers such as regulatory change; focus on turning outputs to insights to drive key business decisions.
Optimise the business structure
A Centre of Excellence (CoE) provides capability and a step increase in output quality. Ensure CoE, retained finance and the business work together. Ensure business owns the data and insight; finance governs integrity and consistency.