For any growing company, profitability analysis is crucial to identifying new growth opportunities that can help drive the business forward. For companies trying to stay afloat amidst a crisis, profitability analysis tools can give C-suites a better understanding of how stable things are financially in terms of their products and services, their customers, and other critical operational efficiencies as well.
The profitability analysis concept hinges on allocating a budget for a company’s operational expenses while having a clear understanding of its actual profit shares in other essential areas. Although it may seem relatively simple to calculate a company’s profit, profitability analysis goes deeper than that and looks more granularly into its accounting activities.
Below are other key reasons why profitability analysis is a vital tool for any growing business.
Improves Visibility on Future Performance
In periods of massive change, organizations need to be guided by a clear strategy and one that can help them thrive in a high-risk business environment. Having the right insight and strategy can enable them to change their path as needed when profits shift amidst navigating in a highly competitive environment.
Having the right FP&A software like Performance Canvas that supports profitability analysis helps give companies access to the data they need to look beyond their current performance reports to start predicting future trends.
For example, by identifying your top-performing products and services through Performance Canvas, you can realign resources to focus time and energy on developing these profitable products more. Alternatively, by identifying the bottom-performing products and services or even projects, decisions can be made actively on whether investing time and resources in them is still a good idea moving forward.
A study that focuses on senior executives in high-growth enterprises observed that leaders who can change their strategy when needed credited a new set of tools that helped them identify the future signals to trigger the change. These signals indicate organizational performance and efficiency and can provide the information most managers need to make timely business decisions.
Help Drive Your Growth Strategy
Many managers rely on indicators to track future profit, check how effective their transformation initiatives are, and make the necessary adjustment to their strategy.
Leaders need to note that goals are not the same as performance indicators. Although many companies set goals, performance indicators should be identified early on to track how the company is faring in achieving them. .Managers need to have access to real data to check how the company is doing in achieving them. Without the right visibility into profitability, it can be challenging for managers to track actual company performance. It will hinder them from driving their corporate strategy in the right direction.
Profitability analysis can help businesses better navigate the future and gives them the information they need to use their growth potential to succeed.
Improve Your Decision-Making
Profitability analysis gives managers a clear picture of the entire company, enabling them to strategize better and plan for growth. Not knowing your company’s weak spots, especially from a business perspective, can cause further problems down the line, leading to losses, additional costs, and failure.
Leaders play a crucial role to jumpstart growth as needed, and profitability analysis, when used with FP&A software, can help them see where the company stands so they can genuinely help their teams act on these growth initiatives or change them up if necessary.
When a business clearly understands profitability, it can guide them to take the necessary steps into future growth and clear their path to effective decision-making.
When finance teams have the right system to analyze their profit and where their weak points are, they can analyze trends that affect profitability. In turn, managers can then decide what changes are necessary to improve these figures for the better, such as controlling the budget for non-profitable areas and focusing on their competitive advantage instead.
How Performance Canvas Can Help with Profitability Analysis
With so many companies struggling to keep their business afloat, it can seem daunting to face change and adapt accordingly. Partnering with an FP&A solutions partner like Performance Canvas that offers profitability analysis can help you budget more efficiently while helping pave the way for your teams to act with the insight so crucial to making real change.
With the right profitability analysis tool at their fingertips, businesses are far better equipped to meet the demands of change by preparing ahead, managing, and transforming crucial aspects of the company and their FP&A teams to make more strategy-driven decisions.
Find out more about how Performance Canvas can help.
