Is your profit data misleading you? Part 2 – applying to the business

Tim Dunn - Menzies Accountant

Tim Dunn – Strategic Advisory Partner

In part one we examined the data challenges that face many SMEs and the power in defining what data you need and the difference between detailed analysis verses meaningful analysis. Now it’s time to consider what parts of your business you want to understand better.

Stage 1 – define what’s important to you

This first stage is about taking a step back and looking at your business to understand what is important to you and what you really need to know. Typical areas which should be considered include:

  • Profit per Product/services
  • Profit per Geographical location
  • Profit per Customer

For example, we work with a number of recruitment agencies. In most instances these agencies provide candidate recruitment to different sectors. We encourage these businesses to ensure revenue can be identified per sector, and that direct costs (e.g. salaries, commissions paid, advertising costs and research fees) are clearly allocated to a sector. This information allows analysis of performance for each sector team.

The purpose of this detailed analysis will not be a global view of the performance of the business, but more a “fine tuning” review to help with future strategy and allocation of resources. Identifying relevant Key Performance Indicators (KPIs), adds further value to this analysis and allows comparability between the different products and services.

This analysis in practice

In the example of the recruitment company servicing different sectors, a comparison of the percentage of staff costs to revenue generated will allow the business owners to identify areas where return is not so good, areas of potential overstaffing.

Similarly a manufacturing company supplying a range of products can assess “a contribution rate”. Essentially a percentage rate, which identifies how much of each £1 of revenue is able to contribute towards the fixed costs of the business. This would be similar to a gross profit level, but should ensure all direct costs are considered.

A word of caution

Although numbers are important, they are not everything in terms of strategy. It is all well and good identifying your most profitable customer or product, but before shifting more resource into this area you have to be confident in the likely future returns. This is as much about demand as it is about current profitability. If the extra resource is not able to generate an appropriate increase in revenue at a consistent margin all you are doing is reducing the profit made on what was your most profitable area. The concept of opportunity cost needs to feature in any analysis.

Stage 2 – can this level of insight be achieved?

Menzies microscope icon

Once you have decided upon the detailed information that will help in making business decisions, you need to revisit the accounting records that are maintained and ensure that this level of insight can be achieved.

Unless you are just trying to analyse per geographical region, sector or team, the likelihood is that your will need information outside of the main accounting record. There are many apps or operating systems which can be added to accounting packages to enable further analysis. Explore these one by one and take the time to think practically about the value of this integration. This leads us nicely on to the final stage.

Stage 3 – Investing time

A Menzies icon of a laptop

Investing time to ensure your accounting records are properly set up to allow efficient reporting is vital. You should be able to generate the management information required at the press of a button. Having to export data into excel for detailed analysis is still a common route for many business and is potentially inefficient and prone to human error.

Being able to drill down into your profit and loss and understand performance at a product/service/team level is really powerful and, in our view a must when looking at strategic planning.

The extent of further performance analysis has to be right for your business and as business owners you should be taking time to reflect on what information will be beneficial to you. Equally the time and cost required to gather this additional information, must not be prohibitive and you should be ensuring your records and systems are set up with the management reporting that you require as a fundamental requirement.

Posted in Blog, Healthcare, Hospitality & leisure, Manufacturing, Not-for-profit, Property & construction, Retail, Technology, Transport & logistics, Recruitment, Legal Services, Financial Services