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Why do you need profitability analysis? (Part - 2)

In the part 1 of this blog (, we discussed few of the pain points that business are facing today. Moving ahead let’s see how would profitability analysis help solve them and how can such a solution be implemented.

Consider a scenario where your company creates profitability report for its products, product lines, customers, channels and geography; or any combination thereof. You as a sales manager sort the customers based on their profitability and know the most profitable and least profitable customers. You treat your most profitable customers best. You also analyze the unprofitable customers and devise plan either to make them profitable or divest them. You have information about the customer-product profitability and clearly know which products to focus for maximizing the company’s profit.

In a different scenario, you as a product manager can see the P&L for each of your products. Based on this information, you work with the sales manager for promoting your best product, right pricing them, cross-selling and rationalizing the product portfolio. Your operation manager can see cost of each product and the activities consumed by them. You brainstorm with him for identifying the non-value adding activities and target them for reduced cost and possibly for reduced cycle time.

As your company decides to embark on a strategic initiative (one of six sigma/BPR/TOC/JIT/lean management etc); you have a concrete baseline to measure the results. You measure the ROI based on hard numbers (profitability figures) along with the soft parameters (customer perception, employee satisfaction etc).

These are few ways in which profitability analysis can assist your company in better and informed decision making. Now we know why do we need the profitability analysis, the next big question is how to prepare the organization for such a change?

First and the most important requirement for profitability analysis is a robust Cost Information System (CIS).The CIS should not be just an extension of Financial Accounting system. It should be designed and developed specifically for costing information based on proven costing methodology preferably Activity Based costing (ABC).

Why ABC? How should the CIS be to support profitability analysis? Finally, how to move towards profitability analysis as a decision making tools? Keep on looking at this space for the next blog series.

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