Profit Evaluation & Improvement
Why do we Calculate Improvement Potential?
The next step is to use the information you have gathered to work out how much better you could be doing and which areas when worked on will make the biggest difference.
In other words, estimate your improvement potential. By using “sensitivity analysis” you can see how sensitive your results are to changes in the key factors driving your profitability.
As a result of doing that, you will know what is at stake – ie:
- How much you stand to gain if you take action to achieve your improvement potential
- How much you will miss out on if you don’t take action
And you can then use those insights into what is at stake to decide how much effort and energy to put into improving your performance!
This is the most important message in this entire folder… One of the biggest causes of business under-performance is managers who say “That’s just the way it is in our industry -and we can’t do anything about it”. So, for example, instead of pre-judging with “We can’t increase prices in our industry”, look at the evidence.
If the benchmarking evidence shows that some of your competitors are earning higher gross profits than you, then there are only two possible explanations: either their prices are higher, or their costs are lower. So how can you learn from them?
And instead of pre-judging , look at the facts. And if the evidence shows that some of your competitors only have debtor days of 40 days, work out how to get yours down from 90 days!
Never fall into the trap of pre-judging what may or may not be possible. Instead of guessing… look at the evidence, think creatively, and use an open mind to look for a better way.