Enhanced Profitability Analysis
Galit Husyt, Executive Director, Advisory services,
EY Israel
April,2016
עמוד 2
Profitability Analysis Scope
Enhanced profitability analysis
April, 2016
•Profitability analysis per:
•Product Group
•Customer Groups
•Business Unit/Line
•Vendors…
•Contribution level:
•Net Revenue
•Margin after Variance costs
•Margin after Fix costs
•EBIT
•EBITDA…
•Overhead & Production Costs
•Transactional & Service Costs
•Cost +
•Value Based
•Competition Based
•Price Update & Trade promotion policy
Pricing Methods
Costing & Allocations
Managerial Reporting
Requirement
Contribution Margin level
The profitability analysis approach is directly connected to the following processes: Pricing, Costing, Contribution margin level and the Managerial Reporting requirement.
עמוד 3
Profitability Leakage Analysis - Price Waterfall Moving From an Aggregate to a Transactional View
Core Responsible / Involved Stakeholders Description
Sales & Marketing, Finance Price Leakages – On & Off Invoice Discounts
Sales & Marketing, Finance, CR, Supply Chain, Procurement Cost to Serve – Transactional & Service Costs
Manufacturing, Procurement COGS - Overhead & Production Costs
Pocket Margin – Net profit (transactional level)
100
20
80
10
70
10
10
50
20
10
20
List
Price
On-Invoice
Discount
Invoice
Price
Off-Invoice
Discount
Net
Price
Transaction
Cost
Service
Cost
Price
Production
Cost
Overhead
Cost
Margin
30%
20%
30%
20%
Price Index
Price Leakages
Cost to Serve
COGS
Enhanced profitability analysis
April, 2016
CFO Focus
Sales Manager Focus
שם המצגת עמוד 4
2015יוני
Ease
of
Co
ntr
ol
Ease of Measurement Benefit Potential
COGS
Cost to
Serve
Price Leakages
Hard to Identify, Hard to Improve
Quick Wins
Easy to identify, Hard to improve
Hard to identify, Easy to Improve
E.g. Transportation Costs
E.g. Non-Standard Off-invoice Discounts
E.g. Raw Material Costs
E.g. On-Invoice Discounts
optimization
Profitability Leakage Analysis – Components Comparison
שם המצגת עמוד 5
2015יוני
Price Setting Framework Building & Controlling Price Points
Price
Range
COGS
Minimum
Profit
Cost to Serve
Price Ceiling / List Price
Price Floor
An effective Price Architecture allows the organization to incorporate and model all key considerations to determine optimal price and ensure economic profitability
Price Ceiling refers to the highest market price that can be charged – either per market demand or regulatory restrictions
Price Floor is generally set to ensure minimum profitability per transaction, which varies by pricing strategy / business objectives
The below table highlights key elements that should be taken into account when setting prices and granting discounts and other promotional programs
X - Core Attribute Mar
ket &
Ext
ernal
Con
diti
ons
Pro
duc
t A
ttrib
utes
Cus
tom
er C
hara
cter
istic
sR
egio
n
Vol
ume o
f S
ale
List Price X X
Price Range X X X
Cost to Serve X X X X
COGS X
Priority Varies Per Client / Industry
עמוד 6
Contribution Margin level
שם המצגת
2015יוני
Based on the company business specialty and industry it is recommended to have this leading figures from the P&L for better managerial decision making:
Net Revenue – Contribution A
Var Contribution margin– contribution B
EBITDA
EBIT
Net Result
Contribution Margin - contribution C
Cost of product sold& discount
Income Statement
Total Gross Revenues
Cost of Product Sold
Payback to Insurance Companies
Total Net Revenues - Contribution A
Material /Transport (excluding cost of sales of product)
Installation Network services costs
Change in Inventory Spare parts
Local Service Provider
Var Contribution margin- Contribution B
Telco Costs
Change in Inventory telco
Contribution Margin - Contribution C
Labor cost
G&A
Bad Debt
Other costs
EBITDA
Depreciation & Amortization
EBIT
Interest expenses
Gain & Losses of Foreign Exchange
Tax
Net Results
Var contribution expenses
Fix contribution margin
Fix operating expenses
שם המצגת עמוד 7
2015יוני
Most Companies identify there revenue and expenses by legal entities and another profit center segment (example: Geography , Business unit..) and use allocation rules for other measurement requirements.
Product Group
Customer Group
BU/ BL
Distribution Channel
Country/ Geography
Company (Legal Entity)
Revenue P&L
Cost of product sold & payback
Net Revenue
Contribution Margin
Personnel cost
EBITDA
Depreciation & amortization
EBIT
Fixed Asset Receivables Payables Inventory (NA)
BS
Operational + CAPEX Cash flow
CF
Full Cash Flow
Reporting Matrix and Data Resolution
עמוד 8
Managerial Entities and Data Resolution
שם המצגת
2015יוני
► The profitability analysis framework is depend on the managerial reporting requirements and the different measurement entities.
► The Profitability analysis approach should be different per each business model alternative.
C B
Alternative 1.a
B
C B
Alternative 3
C B
Alternative 2
B
עמוד 9
Managerial Entities and Data Resolution
שם המצגת
2015יוני
Income Statement
Total Gross Revenues
Cost of Product Sold
Payback to Insurance Companies
Total Net Revenues - Contribution A
Material /Transport (excluding cost of sales of product)
Installation Network services costs
Change in Inventory Spare parts
Local Service Provider
Var Contribution margin- Contribution B
Telco Costs
Change in Inventory Telco
Contribution Margin - Contribution C
Boxes Depreciation
Contribution margin including depreciation - Contribution D
Labor cost
G&A
Bad Debt
Other costs
Adjusted EBITDA
Depreciation & Amortization (Excluding box depreciation)
EBIT
Interest expenses
Gain & Losses of Foreign Exchange
Tax
Net Results
Lega
l En
tity
Geo
grap
hy
Dis
trib
uti
on
Ch
ann
el
Cu
sto
mer
Gro
up
Bu
sin
ess
Un
it/L
ine
Bu
sin
ess
Mo
del
Pro
du
ct G
rou
p
עמוד 10
Managerial Entities and Data Resolution Transactions and allocations
שם המצגת
2015יוני
► For most of the companies there is a gap between the financial statements resolution in the operational system to the managerial reporting requirements
► As part of the allocation methodology we recommend analysis of the finance transaction posting to operational system in order to extend the resolution of the “row” data, and reduce the need for allocation.
► The common practice is to identify per expenses category the data flow and to assign
managerial attribute at the transactional level
שם המצגת עמוד 11
2015יוני
Current State
Future State
Not Feasible
Posting Level
Allocation FI Resolution Manag Reporting
Com
pany
Geogra
phy
Channel
Serv
ice
Custo
mer
gro
up
Ow
ner
Com
pany
Geogra
phy
Channel
Serv
ice
Custo
mer
gro
up
Ow
ner
Revenue
COGS
R&D
S&M
G&A
Tax & Fin
FI Resolution Manag Reporting
Com
pany
Geogra
phy
Channel
Serv
ice
Custo
mer
gro
up
Ow
ner
Com
pany
Geogra
phy
Channel
Serv
ice
Custo
mer
gro
up
Ow
ner
Revenue
COGS
R&D
S&M
G&A
Tax & Fin FI Resolution Manag Reporting
Com
pany
Geogra
phy
Channel
Serv
ice
Custo
mer
gro
up
Ow
ner
Com
pany
Geogra
phy
Channel
Serv
ice
Custo
mer
gro
up
Ow
ner
Revenue
COGS
R&D
S&M
G&A
Tax & Fin
Managerial Entities and Data Resolution Transactions and allocations
עמוד 12
Project Approach & Solution Concept
שם המצגת
2015יוני
Advanced Infrastracture
New dimensions Resolution
Measurement Improvement
VS
Income Statement
Total Gross Revenues
Cost of Product Sold
Payback to Insurance Companies
Total Net Revenues - Contribution A
Material /Transport (excluding cost of sales of product)
Installation Network services costs
Change in Inventory Spare parts
Local Service Provider
Var Contribution margin- Contribution B
Telco Costs
Change in Inventory Telco
Contribution Margin - Contribution C
Boxes Depreciation
Contribution margin including depreciation - Contribution D
Labor cost
G&A
Bad Debt
Other costs
Adjusted EBITDA
Depreciation & Amortization (Excluding box depreciation)
EBIT
Interest expenses
Gain & Losses of Foreign Exchange
Tax
Net Results
Lega
l En
tity
Geo
grap
hy
Ow
ner
Excels vs. system solution Centralized management Support of high data
volume Back up solution for
changes/ delays on SAP implementation
Quick win solution
New analysis by owner New analysis by
Geography (Channel & other are next steps
New layout and view
New KPIs Dynamic graphs Top down allocation Bottom up aggregation
Flexibility and dynamic options Accessible anytime to everyone (with authorization management) Allows historical data
Cross benefits
Three main objectives for the management reporting project and their benefits:
עמוד 13
Project Approach & Solution Concept
שם המצגת
2015יוני
Dimensions resolution
Advanced Infrastructure
Measurement improvement
Operational System
BI/Analytics Tools
LE
Business Unit
Country
Product Group
Channel
Business model
Services
Customer
P&L, BS, CF
Enhance measures • Churn rate • Cost of acquisition • Costumer life time
Advance measures • Sales portfolio • Trends in key markets • Telematics market overview • HR KPI’s
Beginning point Future State
KPIs based on financial reports: • Revenues • EBIT & EBITDA • DPO / DSO • Other financial ratios
Dashboard automatic
excel
עמוד 14
Project Approach & Solution Concept Identifying Customer Profitability Leakages
שם המצגת
2015יוני
Increase
Gross
Margin
Timing
Likeli-
hood
Estimated
Value
Improve
customer
profitability
Withhold adjusting discount from some non-core customers when equalising List Prices
Migrate customers to most profitable SKUs (and formats) and consolidate SKU lines
Establish a profitability floor and stop serving customers below the floor
Renegotiate unprofitable customers starting at a zero-base of discount
Polarise investment - stop investing in non-strategic, low-growth customers
QW
QW
QW
MT
MT
L
M
M
H
M
M
M
M
M
Reduce customer spend on brands where we retain a relatively low share of the profit pool
Increase penetration of our most profitable brands within our key accounts M M MT
M
M MT H
Manage Buying Group discounts to a corridor, to reduce margin erosion via customer migration M MT M
QW
M
M
H
L
H
L
MT
LT
Quick Wins
Medium - Term
Long - Term
High
Medium
Low
High
Medium
Low
Key
ILLUSTRATIVE
EXAMPLE
Stop paying customer logistic charges (e.g. for late delivery) QW M H
Reduce cost-to-
serve
Withhold financial discounts from non-performing customers MT L M
Introduce logistics efficiency discounts and penalties MT L H
Gain control of
temporary price
reductions Eliminate least-productive 20% of promo spend
Enhance process, embed promo governance and enforce sign-off checkpoints
MT
LT
H
H
H
H
Say no to ad hoc (and low ROI) customer requests for promo funding QW M M
Reduce TPR spend that is funding customer margins, rather than reducing consumer price QW M M
Reduce period-end TPR (used to hit volume targets) and refocus it on high margin brands QW M M
Increase
investment
compliance &
effectiveness Renegotiate customer contracts to increase conditionality in our discounts MT H M
Stop paying conditional discount & Sales Drivers where conditions have not been met MT H M
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