You are at the start of the 12Faces path to finding a solution to unsatisfactory profit
There are several ways you can arrive at the conclusion that your profit level is unsatisfactory. Some will be via our ScoreBoard analysis. Or you may have used your power of observation and intuition to arrive at that conclusion.
The path forward now in 12Faces is the same irrespective of what got you to here.
Irrespective of how you got to this point, if your prfotiability is falling, the easist way to look for reasons is to compare the accounting results for a period before any deteriation and the most resent period. The simplest way to do this is to use your annaul accounts for the last two years. Using a full year will help remove the effect of any seasonal issues like quarters with holiday perios.
You may already be famialr with parts of the following anaysis pathway so, to avoid duplication, we provide branchges to backgound information that you cna followi if necessary wheile we move down the fastest path to finding solutions to the problem of unsatisfactory profits.
There is usually a mixture of reasons for unsatisfactory profit. We have a process that;
- idetifies the likley significant contributors
- suggests tests you can use to confirm that are contributing
- helps you short-list the problem issues ones you want to focus on and then
- suggests actions for resolving thiose selected issues
First Decision Branch
Atg this stage, we choose between one or more of the three major contributiors to unsatisfactory profitability;
- falling or static revenue and/or
- increasing Operating Costs or COGS in proportion to revenue change and/or
- Increasing Overhead Costs in proportion to revenue change
As you work through the following steps, keep a record of anything you find that might have contributed to the problem that got you to start this diagnosis. You will likely find several contributors. Latger in this avnalysis, we will look at the reasons for this coming about.
It is vital to have revenue comingin to your business if there is to be a profit at the end of the business workflow.
If Revenue is increasing, it is a sign of problems elsewhere in the workflow so that is the first thing we study
1. Is your Revenue static or falling between time periods?
Yes: linking to Revenue Improvement strategies
1.2 Gross Margin
Gross Margin can be expressed as percentage and calculated by the formula Gross Profit/Revenue *100
If it is falling, it means the costs of your operating processes are growing at a faster rate than your revenue so your business is becoming less effectient at production.
This means your Gros pProfit will reduce in proportion to increasesin Revenue and this will flow directly to falling Operating Ptogits.
Yes: Gross Margin % is falling. Linking to Gross Margin explanation
1.3 Overhead Costs
If you have reached this point, it is3. It is likely that increases in your Overhead Costs are reducing your profit.
You can test this
Linking to Overheads explanation