Training · CO-2 · Lesson 04 of 06
Profitability cases
The rule
Profit falls, find out why. The work is separating a volume problem from a price problem, and a cost problem from both. Say which branch you are testing and why, then move on instead of auditing everything.
The profit equation
Profit = revenue − costs. Revenue = price × volume. Costs = fixed + variable × volume. Break each down to find where the change occurred.
Diagnosing the problem
Compare over time and against competitors. Determine whether revenue or costs drive the decline, then drill into segments: products, customers, regions, channels.
- Revenue
- $100m → $95m
- Costs
- $80m → $88m
- Profit
- $20m → $7m
- Biggest driver
- Costs +$8m
- Of which raw materials
- +$6m
Revenue levers
Price changes, volume shifts, mix changes. Check customer churn, competitive pricing and market share.
- ·Is the market shrinking or are we losing share?
- ·Has product mix shifted to lower-priced items?
- ·Did price cuts or discounts increase?
Cost levers
Separate fixed and variable costs. Look at raw materials, labour, overhead and capacity utilisation. Benchmark against peers.
Recommendations
Recommend actions sized by impact: renegotiate suppliers, adjust pricing, cut unprofitable products. Quantify where possible and note implementation risks.
Hold onto this
- ·Profit equals revenue minus cost; revenue equals volume times price.
- ·Check whether the market moved before you blame the company.
- ·Fixed versus variable costs decide whether the fix is pricing, cost or volume.
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Education, not financial advice. Figures may be simplified for illustration.