MANAGEMENT PROFITABILITY AND COSTS MANAGEMENT

There are several concerns that occupy the mind of any entrepreneur or the management of a company. It has always been this way, but currently some other issues have been added that are essential to address or even manage on a day-to-day basis. Historical events such as the management of a global pandemic, wars in different parts of the world, a potential crisis, setbacks in globalization or difficulties in the supply chain, make managing a more complex task, since decades ago the world was much less interconnected. 

In a world as unstable as the current one, in which there are also many pressures on the companies’ income statements, both from the point of view of income, in which there are many and diverse competitors; and on the other hand, strong pressure on prices as a result of the high inflation in most countries in the world, it is essential to have good control and management of profitability and costs. All this, furthermore, with the additional pressure of the shareholders, requiring an adequate return on their investment, as is totally logical. 

Financial analysis, more than figures and valuations 

Obviously, everything related to operations, efficiency, commercial and marketing activity is very important in terms of increasing a company’s activity and revenues, improving its prices and reducing its costs. But it is essential today to take corporate finances into account. Within this scope, corporate operations (M&A) can be carried out through integrations, elimination of competitors or acquisition of technology, but something much less complex and immediate is financial analysis, must and can be done in the day-to-day life of the company and directly affects both profitability as well as cost management. 

The process of profitability and costs management 

First of all, information collection objectives to be achieved and reports we want must be established, and their usefulness must be clear. Some very useful documents for the financial management of the company are the closing estimates and budgets for one or several years. Making this type of financial projections will help us to gain a better understanding of the company, the composition and evolution of different type of income and costs, and above all, to see the final output of income and expenses, on which we can work to establish action plans guarantee those results, or modify them, if necessary. 

Secondly, to manage profitability and costs, we must know where and how money is earned in our company and sector. Therefore, information must be collected, and it should be as relevant and useful as possible. 

The next step will be to build a series of reports, using very useful tools such as Power Business Intelligence (Power BI). This tool, one of the most used in this field along with Excel, is a data analysis service from Microsoft aimed at providing interactive visualizations and business intelligence with an interface simply for end users to create their own reports and charts. 

With these reports, we must analyze all the financial information of the company, through the breakdown of the income and cost structure, monthly and annual evolutions, all for each type of income and costs, until we can finally understand and analyze in detail the profitability of the company. 

All of this can also be done from an operational perspective, seeing the amount of product or service that has been sold or used; but also, from an income statement and cash flow perspective, to calculate treasury needs or surpluses. 

Reports can also be used at the level of centers or countries, to compare them and draw conclusions, learn from each other, as well as try to gain efficiencies between them. 

Information is one of the most useful tools that a company has, and when used well enough, it can substantially improve profitability and cost management without high investment costs impact, other than paying the Power BI license, teaching one person to use it and pay a good chartered financial analyst. 

Once you have the appropriate reports and they have been analyzed, it is time to establish an action plan, which may include greater commercial or marketing activity, a reduction of the portfolio of products or services to obtain better margins, focusing on those more profitable, or a reduction in costs, whether in personnel costs, the use of office spaces or warehouses, for example. 

Another action is to try to more efficiently align expenses or investments with the best time to make them (i.e., improve timing). Sometimes, companies simply plan their investments according to the efforts they can make at any given time, but they do not plan based on when it is best to make them and when they will have a greater impact on the market or on their companies by reducing costs. 

After having correctly planned the actions, the moment of implementation arrives, probably the most complicated stage. It is usually easy to collect the information, analyze it and design a plan that may seem logical and attractive to the company. An Excel sheet holds everything. The important thing will be to implement the strategy that has been designed and drive the entire company in that direction. 

Finally, with the same tools that have been mentioned above, it is important to do a comparative analysis between our estimates and reality, to see how effective and useful our profitability and cost management has been. Without this, we could make the same mistakes every year, without taking advantage of the learning from each quarter or year using this process and tools like Power BI, which make this work much easier. 

Improving profitability and costs through management and financial analysis 

Integrating this entire process, from obtaining information, identification, financial analysis, planning, implementation and control, will really enhance, without large cash outflows, the profitability of a business and cost management.