enhanced profitability analysis - ey.co.il¡דרי יום/גלית.pdf · •transactional &...

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

Pocket

Price

Production

Cost

Overhead

Cost

Pocket

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


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


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










Telco Costs

Change in Inventory Telco


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


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


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










Telco Costs

Change in Inventory Telco


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


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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This material has been prepared for general informational purposes only and is not intended to be

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advice.

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