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Profit Planning & Analysis For an Uncertain Future

by Sarah Teynor - August 2020 9 min read

It’s all about profitability, right? You can track a million different metrics and ratios but, ultimately, if your company isn’t profitable, it ceases to exist. However, in the coronavirus pandemic, as revenue shrivels and many businesses look for ways to contain their costs, simply being profitable can seem like a herculean task.

In large part, that critical responsibility of finding the profit needle in the haystack falls on the very capable but crowded shoulders of your FP&A team, tasked with finding ways to maximize profitability in an environment that is anything but margin friendly. Therefore, we’re going to examine the profit planning process, why profitability analysis is especially important during the COVID-19 crisis, and look at things CFOs, their teams, and FP&A can do to better guide your company’s decision making.

 

Start at the Top-Line

There’s a pretty good chance the pandemic has changed your revenue streams somehow, maybe even drastically. And since sales revenue plays a pivotal role in your profitability, it only makes sense to begin your planning and analysis by identifying how your company makes money and how it’s changed during COVID-19.

Download: 13-Week Cash Flow Forecast Model

We’ve all read the stories about distilleries switching to hand sanitizer production or restaurants transforming into small supermarkets. Perhaps you haven’t experienced anything quite so dramatic, but it’s still important to fully understand any shifts that have occurred, even nuanced changes.

For instance, has a previously minor product or service – at least relative to total revenue – suddenly taken the pole position in your line of money makers? And, if so, is that dynamic strictly relegated to the short-term, or does it have legs? Put another way, will it continue to be a primary revenue driver for your company as you define what your new normal is going forward?

 

Take a Holistic, Comprehensive Approach With Your Modeling

That’s where FP&A plays a critical role in helping to guide management decisions – by identifying your core competencies in a patently different world. Remember, what’s old isn’t necessarily new again, so your strengths from five years ago, last year, or even Q1 2020 might be permanently behind you as you forge a new path forward. And FP&A is instrumental in identifying that path through profit planning and analysis, particularly when used in conjunction with its cousins in cash flow forecasting, scenario planning, and sensitivity analysis.

That holistic, comprehensive mix model is imperative in helping your management team successfully navigate these unchartered waters during the COVID-19 crisis. Let’s say, for instance, as more data becomes available, it becomes clear that recovery from the pandemic depends on an effective vaccination program that, according to the experts, is likely nine months down the road. You can take that information and flesh out a specific scenario that incorporates that time period since it is now a more probable outcome than the other scenarios.

From there, you can refine that specific scenario with additional information and run a profitability analysis for the different trigger points within it, which, of course, directly feeds your cash flow forecasting. The result is a set of far more revealing insights that integrates the most likely external variables and factors with your particular strengths.

Just as importantly, those insights only become more accurate as you fine-tune your mix modeling with additional data. In other words, despite the foreboding wall of uncertainty and risk standing in front of you, you’re still able to make informed decisions that maximize performance and, thus, profitability.

 

Finding the Right Profitability Mix

Diving a bit further into our nine-month recovery example, let’s assume you’ve already determined that a handful of specific widget lines perform particularly well during quarantine and social distancing mandates. Naturally, these product lines will be vital to your top-line for the next nine months, and perhaps even further into the future, depending on post-pandemic market conditions and demand.

Read Next: Cash Flow Forecasting in the Face of Uncertainty

Now that you’ve identified your most lucrative revenue streams, it’s time to take that information and build on it with a more expansive profitability analysis, one where you find answers to critical questions like:

  • What production and sales volumes do you need to achieve with these revenue streams to reach a particular profitability level?
  • Will your cost structure for each of these lines change in the near future?
  • How will emphasizing these product lines and sources of revenue impact your total sales and overall profit margins?

By addressing these types of questions, your FP&A team is finding the right profitability mix to help your company reach its profit goals. Put differently, this approach allows you to align particular product or service lines with the specific currents and trends within the marketplace, helping you arrive at the right mix of products and profits given a set of unique circumstances.

 

It Takes a Village to Arrive at the Ideal Mix

We know what you’re thinking – our FP&A team is good, but they’re not omniscient. How does our financial planning and analysis translate to operations and a maximized bottom-line? Obviously, FP&A can only do so much, making an integrative, enterprise-wide approach crucial for success.

Thus, you want FP&A to work in tandem with teams across your operations to thoroughly evaluate and implement the models that can lead you to the profitability promised land. It’s an approach that is simultaneously proactive and reactive, continually looking at the road ahead while also incorporating necessary operational changes to meet your profitability target.

For instance, maybe you’ll have to bring back a furloughed group of employees to meet the production volume on a specific product line. In that case, labor management will play a significant role in this process, largely determining your ability to meet production goals and the lion’s share of your costs.

Granted, capital expenditures, inventory, and other costs are crucial as well, so it’s not exclusively about your people. But that’s another vital component of the intersection between profit planning and your master budget – scrutinizing which costs are necessary to continue, along with those that you can put on the back burner for a time.

Perhaps you don’t bring back the entire group of furloughed workers from the product line you want to expand but, instead, add them in waves as your profitability can absorb the additional salaries, employee benefits, and other labor costs. In a nutshell, that is the beauty of a mix model approach – different analyses and angles converge to inform more revealing, insightful strategies, goals, and a keener sense of direction for your business activities.

 

Let Profitability Lead the Way

To state the obvious, things are much different now. Yes, that includes new challenges that you probably didn’t foresee happening at any point in the near future, if ever. After all, did you ever give much thought about what’s involved with a financial close using remote workers? Probably not.

But challenging and impossible are two very different terms. To that point, we’ve discussed how profitability analysis and, from a broader perspective, mix modeling itself can steer you through the innumerable windy, risky roads stretched out in front of you. However, it’s important to remember that profit planning is a critical tool for your company’s bigger picture as well.

At some point, hopefully sooner rather than later, the coronavirus will be behind us. And when that time comes, it’s the businesses that quickly and efficiently adapt to that oft-mentioned new normal that will come out ahead. And when we can breathe a sigh of relief and thankfully see COVID-19 in our collective rearview mirror, how will the lessons learned shape the future of your operations?

From a profitability perspective, are flexible teams and on-demand talent – along with the overhead they eliminate or reduce – viable permanent talent options for you? And what about the efficiencies involved with a finance transformation like streamlined processes and automation technologies? Given how such changes can impact your operating expenses – and, thus, your profits – analyzing those changes and determining what you need to achieve your profitability goals is something you can start today.

Sure, many companies have bigger fish to fry at the moment. We don’t expect a CFO that’s laser-focused on liquidity right now to suddenly invest the majority of his or her time on suddenly transforming their finance function. But, as 2020 has already proved time and again, things change quickly these days, so prescient CFOs and organizations that don’t wait to prepare for their new normal will likely have a significant leg-up on the competition.

 

The Road Ahead

Long-story short, profit planning and analysis, cash flow forecasting, scenario planning, and everything else an FP&A team does for an enterprise can not only lead your company out of the uncertainty woods, but also help you develop a long-term game plan.

As you prepare for everyone’s favorite new buzz term – the new normal – it’s essential that your FP&A takes into account the various possible scenarios ahead, determines that ideal profitability mix between product lines and costs, and sheds a revealing light on the great unknown with accurate forecasting.

Likewise, as a clearing in the uncertainty takes shape, it’s equally important for FP&A to help you develop a more definitive strategy going forward, which might look quite a bit different from your company’s form and function just a few months ago. You know, before the entire world turned upside-down.

Sounds like an awful lot, right? Well, honestly, it is. But to reiterate a previous point, challenging doesn’t equal impossible, so it’s really a matter of preparing your team and enterprise for the road ahead. Needless to say, that’s where a partner like Embark adds so much value. Our expertise and experience – from FP&A to transformation, reporting to compliance – become your expertise and experience.

Download: 13-Week Cash Flow Forecast Model

And at a time when your competition is dealing with the same liquidity, labor, and profitability issues as you, wouldn’t it be nice to have an ace-in-the-hole? One that helps lead you from point A to point B rather than wasting the time, money, and effort involved in blindly feeling your way through? There’s just too much at stake to make the wrong moves.

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