Balancing your agility, resilience, and cost-base (ARC) is critical for thriving in this rapidly changing market. In the second insight of this series, Alan Dale and Alex Mumford explain how you can use it to understand your profitability drivers.

In a constantly evolving environment and competitive landscape, business leaders should be focussed on understanding, sustaining, and increasing margins.

Our clients have varying agendas and objectives – and every situation is different. However, very often the solution is the same: asking the right questions, and assembling and analysing available data and information that allows them to look at their business from a different perspective, not relying on out-dated metrics, performance drivers, and views.

Although there's typically a focus on financial information in decision making, there can be a significant gap between operational, commercial, and financial views, as well as understanding of the business. By bridging these gaps, our clients have accessed more powerful insights that inform better decisions and improve their ARC balance.

The right questions aren't always easy questions

It's important to be upfront with your business and management teams. That often means asking them, and yourself, questions that get to the heart of the matter– and may be challenging and difficult:

  • Do we know which products or services are profitable?
  • How do I appropriately attribute direct and indirect costs to a product or service?
  • Does my pricing strategy reflect our true cost to serve?
  • Is my margin sustainable in the current and forecasted environment?
  • Which operational and business processes cause inefficiency and drive cost for certain product groups and customers?
  • What value does my back-office deliver and how do I attribute it to my products or services?
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Using the answers to look at your business in a different way

Many businesses' worlds have changed – including significantly increased cost-bases and pressures on pricing, new and different competitors, higher cost of debt, continued challenges in recruiting talent, and many more. An incrementalist view of improving performance is often simply not generating the right levels of profitability.

Forward looking business are using fact-based knowledge of their business to rebuild from the ground-up – questioning every aspect of how they operate and why. Some call this process value-stream analysis, while for others it's good old-fashioned zero-based budgeting (ZBB). However, it's not ZBB led by accountants as part of a budgeting exercise, but ZBB in tandem with a deep-rooted challenge to every aspect of the operating model.

By rebuilding your operating model and the associated cost base from the ground up, you'll understand how your business really works and the best way to align your activities and cost-base to profitability drivers.

So, in any situation, understanding your profit depends on being bold, brave, and agile in really understanding and challenging your business to do better. And then take the necessary action at pace to balance your ARC and improve your performance.

For more insight and guidance, get in touch with Alan Dale or Alex Mumford.

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