Improving the bottom line: profits - framework

Question 1

Our client manufactures high-end athletic footwear. Sales are up but profits are flat. What do we need to look at?

Answer 1

1. Use the E(P=R-C) framework. Start with the external factors first. Determine whether this is an industry wide problem or just a company problem.
2. Determine the major revenue streams and how they have changed over time.
3. Examine your costs. Ask what are the major costs, both fixed and variable, and how they have changed over time.
4. Determine whether you want to pump up the volume

Question 2

[ Improving profits ] What questions would you ask to assess company’s revenue? (4)

Answer 2

Always look at the revenue side first. Until you have identified your revenue streams, you can’t know where best to cut costs

1. What are the revenue streams? Where does the money come from?
2. What percentage of the total revenue does each stream represent?
3. Does anything seem unusual in the balance of percentages?
4. Have those percentages changed lately? If so, why?

Question 3

[ Improving profits ] What questions would you ask to assess company’s costs (5)

Answer 3

1. Identify the major variable and fixed costs
2. Have there been any major shifts in costs (e.g., labor or raw material costs?)
3. Do any of these costs seem out of line?
4. How can we reduce costs without damaging the revenue streams?
5. Benchmark costs against our competitors

Question 4

[ Improving profits ] If decided to pump up the volume, what can the company do? (5)

Answer 4

1. Expand into new areas
2. Increase sales force
3. Increase marketing
4. Reduce prices
5. Improve customer service