Analysis and Control—Twin Facets of Profitability Management
Whether you’re dealing with a looming crisis, or riding the crest of a sales wave, for most organizations profitability really does matter. According to the recent FP&A Trends 2021 Survey, profitability management has been a priority investment focus for organizations in 2021, with 60% looking at improving product profitability and 49% customer profitability.
But according to Ventana Research’s article, “Build an Actionable Profitability Management Initiative,” just 34 percent of organizations presently manage customer profitability and 30 percent product profitability. Clearly there is a gap between desire and fulfilment where profitability management is concerned. So, if profitability is so key to organizational success and stakeholder expectations, then why are the percentages of organizations using it not already higher?
Benefits of Profitability Management as a Proactive Discipline
Of course, there are two key facets to profitability management: analysis and control. Profitability analysis goes beyond statutory reporting and profitability KPIs, to give organizations the deep business insights that they need in order to understand how costs flow through and are consumed by the business in the delivery of its products or services. Such insights can provide profitability profiles across various dimensions, such as customer, product, channel, branch, or service.
But having built such a detailed view of profitability, the real benefit to organizations comes in terms of how that information is used. Profitability management brings in the much-needed element of control—a proactive management discipline to effect profitable outcomes, using granular cost and profitability insights, combined with simulation capabilities, to influence and steer informed management decisions.
Challenges to Effective Profitability Management
If you were to critically assess your own organization, how many of you would feel that you have the tools and insights at your disposal to proactively manage the outcomes of profitability? And by this, I mean using data-driven-insights to help direct your decisions, allowing you to actively steer your course towards achieving your profit goals.
Oddly enough I’d expect the response to that question to be quite positive, as most of us would think that we have a healthy approach towards managing profitability. But do we go far enough?
Granular profitability analysis—by which I mean looking deep into the underlying sources of cost and drivers of profit in an organization—is data-heavy, and in the past, accessing the necessary data and integrating this to systems capable of modelling this in any meaningful way proved costly, highly complex, and required significant skill sets.
Given this, many organizations opted for the less costly option of relying on spreadsheets or building home-grown profitability solutions rather than dedicated software systems to produce analytics. But making business-critical decisions on the bad data resulting from inflexible, manual, and error-prone spreadsheets is surely one management activity that should come with a business-health warning!
In reality, many spreadsheet-based systems and home-grown solutions simply won’t give sufficiently detailed and accurate insights for organizations to successfully manage profitability.
Benefits of Modern Profitability Management Solutions
So, what’s changed? According to Ventana Research, technology has changed, with improvements in software usability and modelling capabilities, data availability and data management combining to make the challenge of profitability management easier for business users to address.
In many ways, the barriers to accessing profitability solutions have now been removed, resulting in profitability management that’s an option for all!
- More affordable, for both SMEs and large enterprises
- Simpler and easier to access, with the ability to deploy on-premise or in the Cloud
- More flexible to control
- Friendly to business users
And better still, organizations aren’t limited to using modern technology for profitability management alone. Beyond profitability management, such software solutions can easily address a multitude of organizational process requirements where opportunities for driving control and efficiencies abound, but in which data volumes and complex modelling requirements have limited the possibilities in the past, such as:
- Operational transfer pricing
- Tax calculations
- Sustainability performance management
Explore the Possibilities with Us September 28
Why not take the time to explore the possibilities for a renewed approach towards profitability management and what this might mean to your business? Join the FP&A Trends profitability webcast “Managing Profitability in Uncertain Times” on 28 September, and listen in to the discussion between a panel of profitability experts.
Thanks for reading, and please let me know your views and experiences with profitability management, either in response to this blog, or on LinkedIn