Learn more - Profitability management
Profitability drives companies' value, and companies work on it all the time. This may lead to thinking that all opportunities have been found and used. Still, many keep leaving money to the table that hides in the blind spots and biases of the way they manage profitability.
Top Line
Profitability management does not start at invoiced revenue, and 'selling more' is not the only way to increase top line. Often powerful and fast levers to influence bottom line can be found by diligently working on value-based pricing, discounts, bonuses and price leaks.
Costs
Margin management should aim for landed margin. In practice most work often focuses on some other actively managed margin, e.g. Gross Margin, that accounts only for selected accurately tracked costs, e.g. materials and manufacturing. Companies typically assume that other costs e.g. sales overheads or outbound logistics happen roughly evenly to different products and customers, and can be allocated e.g. based on net sales. This is never the case: there are always extreme outlier products or customers that trigger more than their fair share of these allocated costs.
Landed margin improvement does not necessarily require making good business even better. Instead, big wins are possible by fixing the parts of the business that drags the profit down.
Big picture
Finding opportunities to improve profit requires methodically turning over the rocks for all possible levers that can bring value. Once opportunities have been turned into actions, their execution needs to be coordinated without ever loosing sight of the ultimate goals, EBIT and company value.
Devils in the details
Small streams can make big rivers, and as company value is highly sensitive to margin improvements, these small streams can hide big valuation opportunities.
Management accounting routinely uses averages and allocations when attempting to describe what is good business and what is not. Averages, e.g. product-level costs or customer-level standards, often hide enormous margin opportunities. Targeted margin management can account for these differences and reduce the risk of losing good business when trying to fix bad business, or subsidizing bad business that hides inside an average of good business.