Profitability Reporting
April 29, 2009, 9:04 pm
Where the numbers take on business meaning.
Profitability reporting is a special effort. It has a lot of numbers, including those found on standard accounting and financial reports, but its focus is to provide additional insight into the drivers underlying a company’s profit.
Almost every organization has s set of numbers that purports to cover their financial situation. The larger the company, the more routine and comprehensive the reporting: including whether or not the company generated a profit for the specified time period. But plain accounting reports may reveal little about what is driving the profit. In order to understand a company’s profitability, as opposed to a single profit number, reporting developed specifically to focus on the causes and effects of profitability need to be built.
Profitability reporting incorporates additional data, such as customer, product, organization and market information, so that financial performance can more directly be linked to these foundational business areas.
Companies track key profitability drivers
As important as the accounting numbers are, companies do not thrive on numbers alone. They also spend time on identifying the most important drivers of their profitability. Usually the revenue and the expense components have their own distinct drivers. For example, revenue’s key indicator can be a unit of sale (e.g., # of widgets sold). The largest driver of most organizations’ expenses is the number of employees.
Companies in the same industry tend to adopt the same performance indicators to help them monitor the health of their business. Without doing any formal research, let’s imagine some indicators that would be important for different types of industries:
Hospitals: # of beds filled; # or % of paying patients
Automobiles: # of vehicles sold; prices at the gas pumps; gas mileage
Airlines: passenger seat miles
What are the key drivers for your business?
Our financial reports show we’re profitable. What else matters?
Profit can move in three directions: up, sideways and down. On a management dashboard, this translates into “Green-Yellow-Red.” From a concern perspective, this plays out as “No problem! – That can’t be right…What’s going on? – Crap! What’s wrong?”
Profitability reporting is important because it is always delving into the drivers of profit to provide knowledge about the business and insight into opportunities and challenges. Profitability reporting forecasts these opportunities and challenges so that one has longer lead times to take action: maximize the opportunities, minimize the challenges.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 8
© 2009 Integrated ProfitabilityTM
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