Profitability is an important factor related to value creation by an organization. It allows you to create additional value for your company by offering services to your customers and clients. Profitability analysis is a critical component of FP&A (financial planning and analysis) as it helps you assess your organization’s financial performance over a specific period.
Before diving deeper into profitability analysis, let us define profitability for an organization.
What Does Profitability Mean To An Organization?
Simply put, profit can be defined as the additional value created after offering products/services and generating revenue from the same. Profitability is an organization’s tendency of making a profit and using the same to leverage its processes.
Depending on different contexts, profit can be calculated using the following different ways:
- Variable Profit – Deducting direct costs from revenue earned
- Gross Profit – Cost of delivering to customers deducted from revenue earned
- Operating Profit – Deducting overhead expenses from gross profit
- EBIT (Earnings Before Tax and Interest) – Deducting operating expenses from gross profit
- Net Profit (Bottom Line) – Deducting interests and tax from EBIT
Types Of Profitability Analysis
An organization often sells products or services to a specific target audience through multiple sales channels at different locations. This setup calls for four different types of profitability analysis to understand the company’s performance on various fronts:
- Target Audience/Customers
- Sales Channels
Each of these four factors can be used to determine the profitability of an organization in that aspect. For example, product profitability analysis will involve the assessment of profit earned by the company solely due to the virtue of the product it sold. Similarly, customer profitability analysis will involve the assessment of the profit earned by the company by virtue of the audience it targeted.
With the right datasets, an organization can conduct one or more of these profitability analyses to have a deeper look into the revenue earned and the financial value added to the company.
What Is The Purpose Of Profitability Analysis?
An organization can conduct profitability analysis on a factual basis or to support decisions. A factual profitability analysis is conducted to report a company’s profitability at a specific point in time. Such an analysis can be documented and standardized.
On the other hand, a decision support profitability analysis is conducted to make forecasts and profit projections for the future. Such an analysis may include lifecycle modeling and gives your team a sense of direction to work toward.
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If you want to make sense of the revenue earned by your organization and analyze the profits earned by putting them into the right context, VIZIO helps you implement software solutions that facilitate holistic data analytics and reporting. Our team of trained and dedicated professionals possess years of experience in SAP-based solutions. Depending on the metrics you want to focus on and the objectives you wish to attain, we will implement solutions that best suit your requirements.