Profit analysis, also known as profitability analysis, is the process of evaluating a business’s financial performance to determine how efficiently it generates profits. This can be a crucial step for companies as they seek to understand the financial health of their organization and identify areas for improvement.
There are several methods that businesses can use to conduct a profit analysis. One common approach is calculating the profit margin, which is the percentage of revenue that a company retains after deducting all expenses. A high-profit margin indicates that a business generates a significant profit relative to its income. In contrast, a low-profit margin may suggest that the company struggles to control costs or generate sufficient revenue.
Although we won’t be taking the profit margin, our approach (profit growth) requires four metrics, namely revenue, cost, profit and the previous year’s profit.
Remember, we aim to understand which product contributes to profit growth and how much they contribute.
Profit growth refers to the increase in a business’s profits over time. It is a vital measure of a company’s financial performance and can be a crucial factor in attracting investors and demonstrating the viability of a business.
Several factors can contribute to profit growth. One of the most important is increasing revenue, which can be achieved through various means, such as expanding the customer base, raising prices, or introducing new products or services.
Another critical factor is controlling costs, which can involve reducing expenses or improving efficiency. This can include streamlining operations, negotiating better deals with suppliers, or finding cost-effective ways to produce goods or deliver services.
Profit growth can also be driven by investments in new technologies or other assets that can improve the productivity and efficiency of a business. For example, investing in new equipment or software may help a company reduce costs and improve its bottom line.
Overall, profit growth is a crucial factor in the success and sustainability of a business. By increasing revenue, controlling costs, and making strategic investments, companies can drive profitable growth and position themselves for long-term success.
Now let’s calculate the profit growth.
Let’s see this on a card.
Clearly, between the end of 2015 and the end of 2016, a profit of about $309,157.63 was made. The question is now which products constitute this profit.
It’s pretty straightforward, just storytelling from now as you have created the necessary measures. Let’s use a waterfall chart to communicate this.
From the chart above, we can quickly identify in about 5 seconds which product contributes to the profit growth and how much.
Let’s show the profit growth as a percentage because, say, there were zero sales for Product 1 last year, and this year, a profit of $52k was made, that’s a 100% increase in profit, and we want to be able to see those also.
Let’s see this in a visual
With percentages, your stakeholders can now begin to picture it better. For instance, Product 5 had a profit of $52k; I didn’t even imagine it well enough until I saw over 200% increase from the previous year’s profit which is a massive increment.
If an investment guarantees me a 200% increase in a year, I will throw all my money into it.
The sweet part is all this is integrated with our data model.
Pretty straightforward, right? Sometimes a simple solution is all you need to solve that problem.
This would be the last article this year—Merry Christmas and Happy New Year in advance. See you hale & healthy in 2023, Inshallah.