Carl Taylor Senior Consultant

After challenging times in 2020/21, as we head into 2022, we’re all interested in looking at ways to improve and maximise the profitability of our businesses.  At the end of the day, that’s the reason why businesses exist – to make profit, turn it into cash and create value.

A lot of us are happy with looking at the overall picture – we think that if our overall profit, loss and balance sheet are giving us good results, that’s all fine, and there’s nothing to worry about.

However, if you only ever look at your overall total performance, you’ll be missing some valuable insights into your business that would give you the secret to unlocking more profit. For example, you could look at your results for the year and feel relatively happy:

Example Company Ltd
Year ended 31.12.21
Total
Sales £4,500,000
Cost of sales £3,170,000
Gross profit £1,330,000
Gross profit % 30%

Everything in the above example looks great, but by breaking down the reporting you will really start to get valuable insights – where are you really making money? Where are things not quite right?

By taking the example above and filtering the overall total results into sales and GP% by product group, we can see that Product z is having a detrimental effect on the performance of the business.  It’s pulling the whole gross profit and net profit performance of the business down. This clearly needs addressing, but the only way you would know there was an issue is if you reported on it separately.

Example Company Ltd
Year ended 31.12.21 - Divisional
Product x Product y Product z Total
Sales £2,000,000 £1,000,000 £1,500,000 £4,500,000
Cost of sales £1,300,000 £580,000 £1,290,000 £3,170,000
Gross profit £700,000 £420,000 £210,000 £1,330,000
Gross profit % 35% 42% 14% 30%
 


Dragging profitability down!

 

So, with this information at your fingertips, you can make some impactful decisions about product z.  You might find that sales pricing is out of date, or that procurement haven’t been putting any focus into supplier relationships in product group z.  If this is highlighted, and some real focus is put into product Z it could transform the overall performance of the business:

Example Company Ltd
Divisional Scenario
Product x Product y Product z Total
Sales £2,000,000 £1,000,000 £1,500,000 £4,500,000
Cost of sales £1,300,000 £580,000 £975,000 £2,855,000
Gross profit £700,000 £420,000 £525,000 £1,645,000
Gross profit % 35% 42% 35% 37%

Where should you start?
Start by thinking about the different areas of your business, and where you’d like to break your profitability down.  It will be different for every business, but here’s some examples:

  • Product group
  • Sales person
  • Geographical area
  • Revenue stream
  • Project
  • Customer group

Working out how much profit each part of the business is making is fine, but what about cashflow? It’s possible to take the whole exercise a step further, to find out exactly which parts of your business are generating cash, and which are consuming cash, giving you critical insights to help fine tune your business to make every area profitable and cash positive.

So, for those looking to really drive the financial performance of their businesses forward, divisional profitability and cashflow analysis is an essential tool.

Please note: This article is provided for information only and was correct as at time of writing (19/01/22). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.