Profitability is a vital factor when managing an organization. For some, it is the main target by which success is measured and investors are rewarded. For others, such as non-profitable organizations, profitability is more focused on ensuring costs are the same or lower than income and effectively applying resources to achieving the organization’s aims.
In today's unpredictable economic landscape, managing profitability effectively is crucial for businesses to thrive. This article delves into the multifaceted approach necessary for maintaining profitability, drawing on insights from the FP&A Trends Webinar. The webinar featured experts from academia, industry, and technology, providing a holistic view of profitability management.
The year 2020 was a stark reminder of the importance of robust financial planning and analysis (FP&A). Companies had to pivot quickly, relying heavily on financial data to navigate through the crisis. Profitability emerged as a key focus, encompassing more than just revenue minus cost. It now includes several dimensions, such as product lifecycle, business drivers, and macroeconomic factors.
Monte Swain, a professor at Brigham Young University, presented the academic viewpoint using the DuPont model. This model, dating back to 1914, breaks down profitability into investment turnover ratio and profit margin to calculate Return on Investment (ROI). The DuPont model emphasizes the interconnectedness of sales, investment, and costs. Swain highlighted the importance of continuous analysis across these components to ensure comprehensive profitability management.
Robert Ycmat, CFO at Revere Health, provided practical insights into profitability management. He discussed the FP&A workflow model used at Revere Health, which involves allocating shared revenues and costs accurately. This approach enables the generation of detailed Profit and Loss (P&L) statements, essential for granular and enterprise-level financial analysis. Ycmat emphasized the need for strong collaboration between finance and business teams to understand business drivers effectively.
Michel Haesendonckx from SAP SE discussed the role of technology in profitability management. A poll during his presentation revealed that 54% of participants still rely on Excel for profitability reporting, while only 10% use advanced ERP systems. Haesendonckx highlighted the potential of leveraging technology to enhance profitability analysis. He showcased tools that connect data sources and provide instant visualizations, making complex financial data more accessible and actionable.
Managing profitability in uncertain times requires a comprehensive approach that integrates academic theories, practical applications, and technological advancements. By understanding the drivers behind profitability and aligning them with corporate strategy, businesses can navigate through uncertainty and achieve long-term success.
