What Is Profitability Analysis?

If you want to keep your eyes on the financial viability of your business, then it is vital that you perform Profitability Analysis. The specific profitability measures that you require will depend on your industry. At the very least, you will need to define and monitor:

• Profit - Profit is commonly defined as Revenue minus Costs during a specified time period;
• Profit Margin - Profit Margin is defined as the ratio of Profit to Revenue during the corresponding time period.

In order to perform a comprehensive analysis, you must define your profitability measures at the finest possible level of granularity. Of course, this will depend mainly on your company's ability to allocate both direct and indirect costs associated with your business activity to the desired granularity level. It is possible that, as in most companies, you can allocate your costs all the way down to the level of a particular product/service provided to the customer account in a calendar month. From this level, your profitability measures can be aggregated up to the Account, Customer, and Product/service.

Perhaps, you may wish to analyse the following key measures:

• Average Revenue per Customer - Total revenue divided by your total number of customers, expressed in GBP, or USD, or EURO, or local currency;
• Average Gross Margin per customer - Total gross margin divided by your total number of customers, expressed as an amount per customer in GBP, or USD, or EURO, or local currency;
• Average Net Margin per customer - Total net margin divided by your total number of customers, expressed as an amount per customer in GBP, or USD, or EURO, or local currency;
• Fixed Overheads per customer - Total fixed overheads divided by your total number of customers, expressed as an amount per customer in GBP, or USD, or EURO, or local currency;
• Base Operating Level Overhead per customer - Total base operating level costs, i.e. the minimum cost of an operation regardless of your number of customers, expressed as an amount per customer in GBP, or USD, or EURO, or local currency.

“When an archer misses the mark, he turns and looks for the fault within himself. Failure to hit the bull's eye is never the fault of the target. To improve your aim - improve yourself.”

Gilbert Arland