The second of the 5-chapter Science of Business Wealth financial performance evaluation is profitability growth.
Practitioners of our Business Health Assessment mention “I can show the results but how can I help the improvement process”. This diagnostic evaluation process is aimed at helping you through that journey.
Remember you goal is to identify where improvement or opportunity lies. The business owner will know how to take your analysis and make it actionable.
Profitability growth is measured by the increase in profit per revenue $ from one period to the other.
The core components of profit performance is:
- The performance of gross profit from the previous period to the current period.
- The way operating costs have behaved from the previous period to the current period.
Profitability is considered in relation to revenue growth.
The question is “has profitability improved irrespective of whether revenue has grown or declined”
Profitability growth is a good indicator of how scalable the business is.
This part of the diagnostic series deals with gross profit performance also known as above the line performance.
Gross profit diagnosis follows a similar structure to the revenue diagnostic with the key difference is that we include the way gross profit behaves within the different forms of revenue segmentation.
- The only 4 ways to grow
This matrix is always a good starting point. Identify your existing products and services and your existing customers. New customers would include customers attained within the last 12 months. New product or services would include those developed and brought to market within the last 12 months. Of course, you can modify the time frames to suit your analysis if so required.
Compare the results with:
- Your expectations
- Your strategy
- Segment according to the 80/20 rule
Evaluate how your customers are growing based on say the top 10 the mid-tier group and the smaller group
- Segment according to customer behavior (Customer retention)
Knowing how your customers behave can be very useful especially when you integrate this with the way you manage your margins.
- Purchase frequency
Segmenting you customers according to purchase frequency. The frequency that you set should be defined based on the business model.
- Revenue by product or service
Reviewing the performance of each defined product or service can tell you about the effectiveness of each value offer.
By now you should have an idea of the various ways that you can segment your revenue to help decide where you should focus your business priorities.