There are many ways to improve profitability, ranging from those relatively straightforward to complex. This topic is especially critical now, for a variety of reasons, including overall low economic growth and substantial ongoing economic uncertainty.
“Performance analysis” is often used to determine ways to increase profitability and earnings, and it is the analysis and scrutiny of business results in hopes of identifying ways of improving profits. This “performance analysis” is often part of “performance improvement” efforts. During “ordinary” times, this type of performance analysis (also referred to as “business analysis”) is often neglected or done in an ineffective manner. One way of identifying whether such “performance improvement” is being properly performed is to gauge its results – if it seems to not be increasing profitability (i.e. not illuminating ways to improve revenues and earnings) then it is likely being performed in a suboptimal or incorrect manner.
Companies across the business spectrum have, over the last few years, adapted to various challenging economic conditions in a number of ways, including such standard actions such as job cuts, price cuts, and expense reduction measures. But are these, and other actions such as tighter “cash management”, appropriate and adequate given the complexities of the current and future business environment?
Performance analysis is in many ways the answer to this question. Obvious “common sense” solutions, enacted to increase profitability, may be inappropriate and/or inadequate actions during this complex business climate. Furthermore, during these times, to the extent that a company is able to adapt properly, it could attain significantly increased profitability both on an absolute basis, as well as relative to its competitors.
Although performance analysis seems attractive, given the complexities of today’s business climate it can be even harder to properly perform. In addition to the difficulty of assessing and adapting to the fundamental drivers of success, the unpredictable changes in the dynamics of this (at best) low-growth economy may well present factors that could render traditional performance analysis ineffective, if not destructive. Performance analysis may may have to be performed at a higher level.
While there are almost innumerable areas and processes that can be analyzed in order to increase profitability – and, of course, the areas that should receive scrutiny varies among companies – a few common areas include:
- Industry Cost Structure – On a basic level, are the costs fixed v. variable? Having a very good idea of this dynamic, and how it relates to the changing economic landscape, is key.
- Company Cost structure – How does the company’s cost structure compare to that of other companies in its industry? How might the company gain competitive advantage? How important is scale to overall profitability?
- Sales Analysis – What are the trends in sales, and how might they be optimally viewed in order to make outsized improvement in sales results and earnings?
- Cost-cutting – Is cost-cutting a valid and sustainable manner in which to increase profitability? What methods should be used to assess its impact on profits, both from a short-term and long-term perspective?
Given the (at best) low-growth business climate, there is an increased need to conduct performance analysis in order to increase profitability. If done correctly, such analysis can provide significant benefits in many areas. Conversely, those businesses that don’t engage in meaningful analysis might find themselves suffering a lack of profitability and various related consequences.