Ftm Business Template - Margin Analysis
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Margin Analysis Business Template
What is a Margin Analysis?
When should you use it?
The Margin Analysis template provides a structured method for identifying and exploiting opportunities for increasing revenues and reducing costs.
Get into the habit of conducting quarterly reviews of the key areas of the business such as high emphasis or high growth product-markets. A key part of this will be the elimination of costs associated with product or market complexity.
Why is it relevant? The continuous maintenance and protection of margins is critical to the profitability of a business or product line and provides the free cash-flow necessary for future investment and growth.
Who needs to be involved? Ensure that everyone in your team understands the key factors that drive increases in revenues and reductions in cost. Whilst most will not be responsible for overall profitability, the choices that each will take on a day-to-day basis will impact on margin.
How should you implement it? Appoint a member of your team to be responsible for the formal analysis on a quarterly basis. This will not only identify opportunities for improved profitability, but it will identify ways in which core process can be simplified to improve overall effectiveness and efficiency. Also, use the Margin Analysis tool whenever a new product or service is introduced – this will act as a checklist to stop unnecessary cost and complexity being introduced in the first place.
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Margin Analysis This is a case example based on a fictitious company called TVT – all the data is displayed for demonstration purposes only. For a detailed explanation of what each cell is used for please refer to the Virtual Consultant on the following pages.
Form 1: Analysis Summary Summary
Status
Analysis Title
TVT - Margin Analysis
Last Update
23-Jan-2009
Description
Analysis of the TVT international business for opportunities for profit improvement
Status - Costs
Significant opportunities on both the revenue and cost sides
Analysis Leader
Andy Bruce
Status - Revenue
Red
Executive Sponsor
Patrick Harper-Smith
Status - Costs
Amber
Form 2: Revenue Analysis REVENUES
Increase in income or budget allocation
I
U
Status
Action
R1 - Improve fit with customer needs
Closer alignment of current product range to the requirements of local European markets
9
5
Amber
1
R2 - Increase sales effort
Initial effort will be in conjunction with strategic partners who will head up sales activities
2
5
Green
0
R3 - Increase brand awareness
Potential to have a massive impact but will take time to build and needs to be based on successful high quality products
10
3
Red
2
R4 - Lower price
The market is highly competitive, but most competitors have similar price models
1
1
Green
0
R5 - Grow the market
The European market is well established, and as a new entrant we would have little ability to influence overall market size
0
0
Green
0
R6 - Grow the segment
A highly differentiated strategy may enable us to expand the luxury segment - need to make a decision on positioning quickly
6
9
Amber
1
R7 - Sell to a new segment
This is the major area of potential in terms of taking proven luxury products into new markets
10
10
Red
2
R8 - Increase price
The commodity nature of the market means that there is little scope of price increase above the general level of competition
0
0
Green
0
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Form 2: Cost Analysis COSTS
Reduction in operational costs or overheads
C1 - Improve channel efficiency
I
U
Status
Action
This represents a major opportunity as the current approach of going direct is proving costly and ineffective
10
8
Red
3
C2 - Redesign products and services
The current product range should provide a reasonable fit but packaging may need to be adapted to local markets
5
2
Amber
1
C3 - Reduce product range
Initial market entry will only be via a sub-set of current products
0
0
Green
0
C4 - Reduce cost of supplies
Costs will not be a prime driver
0
2
Green
0
C5 - Reduce supplies complexity
There may be opportunities to source closer to International markets - this can be explored in due course
5
7
Amber
1
C6 - Reduce supplier complexity
This may link with supplies complexity and should be assessed as part of a formal analysis
5
2
Amber
1
C7 - Reduce inventory Need to think carefully about impact on warehousing and costs logistic costs - seeking to partner with region logistics groups
7
10
Amber
2
C8 - Change workflow Major opportunity to fundamentally redesign all supply chain (process) processes
10
10
Amber
1
Current products in the luxury range already have an enviable position for quality in the market
0
0
Green
0
C10 - Automate or use Integration of logistics with European partners will need a technology much greater degree of technology / IT consistency
6
5
Amber
2
C11 - Improve skills levels
Need to build experience in selective international markets and skills in integrated supply chains
5
2
Amber
1
C12 - Consolidate facilities
There is no intention to own our own facilities in Europe but to work with strategic partners
0
0
Green
0
C13 - Consolidate equipment
The current policy is to lease equipment as required or to work with partners - however, there will need to be a review of the IT strategy in due course
6
2
Amber
1
C14 - Consolidate roles
Major expansion will result in a fundamental re-evaluation of the current structure of both sales and marketing and logistics, with the resultant scale economies
7
5
Amber
1
C15 - Reduce finance charges
Expansion will be managed through internal 'organic' growth incurring no finance charges
2
2
Amber
1
C9 - Improve quality
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Virtual ConsultantTM The Virtual ConsultantTM provides a step-by-step guide to completing this business template. It is worded as a series of questions designed to make you stop and think about this topic in a challenging and creative way – as if a business coach or consultant was sitting next to you.
Form 1: Analysis Summary Audit Title What is the brief title for this analysis? Description What is the more complete description of this analysis? Analysis Leader Who is primarily responsible for the completion of this analysis? Last Update When was this analysis last updated? Status What is the current status for both Revenue Increase and Cost Reduction?
Red = major concerns / opportunities and immediate corrective action is required Amber = some concerns / opportunities and needs to be monitored carefully. Future development action may be required Green = no major areas of concern or opportunity
Update Finally, what is the latest brief update on the current status or progress?
Forms 2 and 3: Revenue & Cost Analysis Revenues and Costs What alternative ways are there for improving the financial and operational performance of your business or team? Impact What is the overall impact of each opportunity? 10 = Could dramatically impact on performance and fundamentally change the way in which the business or team operate to 1 = Marginal operational impact only Urgency What is the urgency for each item? 10 = Very urgent and needs to be addressed in the next few days to 1 = Not urgent at all and can be addressed as and when there is a lull in the current workload Action What specific tasks are planned in order to realise the potential for improvement in each area?
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Detailed checklist – Revenue Increase
Improve fit with customer needs How can you change the design of your products, services or processes to better match the basis on which customers make their choices? This should increase the amount of products and services sold
Increase sales effort What can be done to increase the amount of sales effort in terms of the number involved in the sales process, the number and quality of the sales team, or the use of sales partners?
Increase brand awareness What actions will increase the awareness and liking for your brand in your target market? your aim is to be the supplier of choice with your target segments, but be aware that supporting a product or company brand can be expensive in terms of time and money
Lower price What impact will lowering the price have. If the elasticity of demand is high, then lowering price may significantly increase volumes - but make sure it is at an acceptable margin
Grow the market What actions can you take to grow the total market so that maintaining your market share will ultimately increase sales? Few organisations have this as an option and that it is typically only open to market leaders
Grow the segment What can be done to grow the segments of the market that you have chosen to focus on? Smaller organisations can have a greater impact here than trying to grow the overall market. Think about how you might switch consumers from other segments
Sell to new segment Who else might want to buy your products and services? This might be a similar segment to your current customers, but it might also be quite different. If selling to a new segment, you may need to alter your products, services of processes
Increase the price Finally, what impact would increasing price have? If price elasticity is low, then increasing prices may increase margins significantly for little loss of volume
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Detailed checklist – Cost Reduction
Improve channel efficiency What can be done to make current channels or partners more effective and efficient? Should you use other routes to market, or can you take actions to improve their operating processes? Redesign products and services What can be done to simplify current products and services in order to reduce costs? This typically involves simplifying he design, or cutting out functions that the customer really does not value Reduce product range Can the product range be simplified by delisting or stopping selected products or services? This will allow you to reduce some of your overheads associated with servicing the 'tail', but will also allow you to focus on the top 20% of customers that probably contribute 80% of your revenues. You should not cut off those smaller products that represent significant future growth or are important to your strategic customers Reduce cost of supplies What can be done to reduce the cost of supplies? Put together a pareto profile of your supplier and focus on those areas of greatest potential - i.e. are of greatest expenditure. Can you renegotiate the contract, change supplier or change the part used? Reduce supplies complexity What can be done to simplify the supply chain? Can you consolidate suppliers so that you have fewer to deal with (and therefore less bureaucracy and complexity), and have greater buying power? Reduce inventory costs Is there an opportunity to reduce the costs associated with holding stock? Can you switch to a Just-in-Time (JIT) system of ordering from suppliers, can you relocate to cheaper warehousing, can you change the basis on which you pay suppliers? Change workflow (process) How can operational activities be changed to improve effectiveness and efficiency? Ideally you will be able to eliminate some activities, and simplify others - ask if all tasks are really necessary. Look first at those tasks that have greatest impact on customer service levels and make sure they are being performed well, and then focus on high time or high costs tasks to simplify Improve quality What can be done to improve quality and therefore improve customer satisfaction and reduce wastage or rework? Nowadays, quality is a given, and companies that fail to deliver as promised on time and in budget will lose customers Automate or use technology How can technology help? Could IT be used more effectively tom improve communication, management information or integration with suppliers and customers? What processes can be automated in order to improve workflow or reduce costs? Investment will be required, and so you should have a clear estimate of the anticipated return-on-investment Improve skills levels How competent are the team, and would new or improved skills in selected areas impact on performance? Process skills such as decision making, project management or risk mitigation are often critical to growing companies, but don't forget basic admin skills such as typing and time management
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Consolidate facilities What can be done to take costs out of the facilities? Can operations be simplified into one location, should you consider leasing rather than buying, could you co-locate with partners? Consolidate equipment Is the current level of investment in equipment necessary or can it be simplified? Are some machines not being used and simply taking up space and therefore incurring overhead costs? Consolidate roles Can roles be consolidated to reduce the number of people required in certain areas? not only will this reduce costs, it provides an opportunity to get the team to focus on what is really important to success. Look for areas to multi-skill in order to give greater job diversity and business flexibility - this is particularly key in small businesses Reduce finance charges Finally, can the finance charges be reduced - by avoiding credit cards charges, restructuring the business loan, or seeking alternative sources of finance such as private equity
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Margin Analysis Use the following blank template to address an issue or opportunity within your business or team
Form 1: Analysis Summary Summary Analysis Title
Status Last Update
Description
Status - Costs
Analysis Leader
Status - Revenue
Executive Sponsor
Status - Costs
Form 2: Revenue Analysis REVENUES
Increase in income
I
R1 - Improve fit with customer needs R2 - Increase sales effort R3 - Increase brand awareness R4 - Lower price R5 - Grow the market R6 - Grow the segment R7 - Sell to a new segment R8 - Increase price
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
U
Status
Action
Form 2: Cost Analysis COSTS
Reduction in operational costs or overheads
I
C1 - Improve channel efficiency C2 - Redesign products and services C3 - Reduce product range C4 - Reduce cost of supplies C5 - Reduce supplies complexity C6 - Reduce supplier complexity C7 - Reduce inventory costs C8 - Change workflow (process) C9 - Improve quality C10 - Automate or use technology C11 - Improve skills levels C12 - Consolidate facilities C13 - Consolidate equipment C14 - Consolidate roles C15 - Reduce finance charges
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
U
Status Action
What is a Margin Analysis?
When should you use it?
The Margin Analysis template provides a structured method for identifying and exploiting opportunities for increasing revenues and reducing costs.
Get into the habit of conducting quarterly reviews of the key areas of the business such as high emphasis or high growth product-markets. A key part of this will be the elimination of costs associated with product or market complexity.
Why is it relevant? The continuous maintenance and protection of margins is critical to the profitability of a business or product line and provides the free cash-flow necessary for future investment and growth.
Who needs to be involved? Ensure that everyone in your team understands the key factors that drive increases in revenues and reductions in cost. Whilst most will not be responsible for overall profitability, the choices that each will take on a day-to-day basis will impact on margin.
How should you implement it? Appoint a member of your team to be responsible for the formal analysis on a quarterly basis. This will not only identify opportunities for improved profitability, but it will identify ways in which core process can be simplified to improve overall effectiveness and efficiency. Also, use the Margin Analysis tool whenever a new product or service is introduced – this will act as a checklist to stop unnecessary cost and complexity being introduced in the first place.
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Margin Analysis This is a case example based on a fictitious company called TVT – all the data is displayed for demonstration purposes only. For a detailed explanation of what each cell is used for please refer to the Virtual Consultant on the following pages.
Form 1: Analysis Summary Summary
Status
Analysis Title
TVT - Margin Analysis
Last Update
23-Jan-2009
Description
Analysis of the TVT international business for opportunities for profit improvement
Status - Costs
Significant opportunities on both the revenue and cost sides
Analysis Leader
Andy Bruce
Status - Revenue
Red
Executive Sponsor
Patrick Harper-Smith
Status - Costs
Amber
Form 2: Revenue Analysis REVENUES
Increase in income or budget allocation
I
U
Status
Action
R1 - Improve fit with customer needs
Closer alignment of current product range to the requirements of local European markets
9
5
Amber
1
R2 - Increase sales effort
Initial effort will be in conjunction with strategic partners who will head up sales activities
2
5
Green
0
R3 - Increase brand awareness
Potential to have a massive impact but will take time to build and needs to be based on successful high quality products
10
3
Red
2
R4 - Lower price
The market is highly competitive, but most competitors have similar price models
1
1
Green
0
R5 - Grow the market
The European market is well established, and as a new entrant we would have little ability to influence overall market size
0
0
Green
0
R6 - Grow the segment
A highly differentiated strategy may enable us to expand the luxury segment - need to make a decision on positioning quickly
6
9
Amber
1
R7 - Sell to a new segment
This is the major area of potential in terms of taking proven luxury products into new markets
10
10
Red
2
R8 - Increase price
The commodity nature of the market means that there is little scope of price increase above the general level of competition
0
0
Green
0
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Form 2: Cost Analysis COSTS
Reduction in operational costs or overheads
C1 - Improve channel efficiency
I
U
Status
Action
This represents a major opportunity as the current approach of going direct is proving costly and ineffective
10
8
Red
3
C2 - Redesign products and services
The current product range should provide a reasonable fit but packaging may need to be adapted to local markets
5
2
Amber
1
C3 - Reduce product range
Initial market entry will only be via a sub-set of current products
0
0
Green
0
C4 - Reduce cost of supplies
Costs will not be a prime driver
0
2
Green
0
C5 - Reduce supplies complexity
There may be opportunities to source closer to International markets - this can be explored in due course
5
7
Amber
1
C6 - Reduce supplier complexity
This may link with supplies complexity and should be assessed as part of a formal analysis
5
2
Amber
1
C7 - Reduce inventory Need to think carefully about impact on warehousing and costs logistic costs - seeking to partner with region logistics groups
7
10
Amber
2
C8 - Change workflow Major opportunity to fundamentally redesign all supply chain (process) processes
10
10
Amber
1
Current products in the luxury range already have an enviable position for quality in the market
0
0
Green
0
C10 - Automate or use Integration of logistics with European partners will need a technology much greater degree of technology / IT consistency
6
5
Amber
2
C11 - Improve skills levels
Need to build experience in selective international markets and skills in integrated supply chains
5
2
Amber
1
C12 - Consolidate facilities
There is no intention to own our own facilities in Europe but to work with strategic partners
0
0
Green
0
C13 - Consolidate equipment
The current policy is to lease equipment as required or to work with partners - however, there will need to be a review of the IT strategy in due course
6
2
Amber
1
C14 - Consolidate roles
Major expansion will result in a fundamental re-evaluation of the current structure of both sales and marketing and logistics, with the resultant scale economies
7
5
Amber
1
C15 - Reduce finance charges
Expansion will be managed through internal 'organic' growth incurring no finance charges
2
2
Amber
1
C9 - Improve quality
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Virtual ConsultantTM The Virtual ConsultantTM provides a step-by-step guide to completing this business template. It is worded as a series of questions designed to make you stop and think about this topic in a challenging and creative way – as if a business coach or consultant was sitting next to you.
Form 1: Analysis Summary Audit Title What is the brief title for this analysis? Description What is the more complete description of this analysis? Analysis Leader Who is primarily responsible for the completion of this analysis? Last Update When was this analysis last updated? Status What is the current status for both Revenue Increase and Cost Reduction?
Red = major concerns / opportunities and immediate corrective action is required Amber = some concerns / opportunities and needs to be monitored carefully. Future development action may be required Green = no major areas of concern or opportunity
Update Finally, what is the latest brief update on the current status or progress?
Forms 2 and 3: Revenue & Cost Analysis Revenues and Costs What alternative ways are there for improving the financial and operational performance of your business or team? Impact What is the overall impact of each opportunity? 10 = Could dramatically impact on performance and fundamentally change the way in which the business or team operate to 1 = Marginal operational impact only Urgency What is the urgency for each item? 10 = Very urgent and needs to be addressed in the next few days to 1 = Not urgent at all and can be addressed as and when there is a lull in the current workload Action What specific tasks are planned in order to realise the potential for improvement in each area?
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Detailed checklist – Revenue Increase
Improve fit with customer needs How can you change the design of your products, services or processes to better match the basis on which customers make their choices? This should increase the amount of products and services sold
Increase sales effort What can be done to increase the amount of sales effort in terms of the number involved in the sales process, the number and quality of the sales team, or the use of sales partners?
Increase brand awareness What actions will increase the awareness and liking for your brand in your target market? your aim is to be the supplier of choice with your target segments, but be aware that supporting a product or company brand can be expensive in terms of time and money
Lower price What impact will lowering the price have. If the elasticity of demand is high, then lowering price may significantly increase volumes - but make sure it is at an acceptable margin
Grow the market What actions can you take to grow the total market so that maintaining your market share will ultimately increase sales? Few organisations have this as an option and that it is typically only open to market leaders
Grow the segment What can be done to grow the segments of the market that you have chosen to focus on? Smaller organisations can have a greater impact here than trying to grow the overall market. Think about how you might switch consumers from other segments
Sell to new segment Who else might want to buy your products and services? This might be a similar segment to your current customers, but it might also be quite different. If selling to a new segment, you may need to alter your products, services of processes
Increase the price Finally, what impact would increasing price have? If price elasticity is low, then increasing prices may increase margins significantly for little loss of volume
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Detailed checklist – Cost Reduction
Improve channel efficiency What can be done to make current channels or partners more effective and efficient? Should you use other routes to market, or can you take actions to improve their operating processes? Redesign products and services What can be done to simplify current products and services in order to reduce costs? This typically involves simplifying he design, or cutting out functions that the customer really does not value Reduce product range Can the product range be simplified by delisting or stopping selected products or services? This will allow you to reduce some of your overheads associated with servicing the 'tail', but will also allow you to focus on the top 20% of customers that probably contribute 80% of your revenues. You should not cut off those smaller products that represent significant future growth or are important to your strategic customers Reduce cost of supplies What can be done to reduce the cost of supplies? Put together a pareto profile of your supplier and focus on those areas of greatest potential - i.e. are of greatest expenditure. Can you renegotiate the contract, change supplier or change the part used? Reduce supplies complexity What can be done to simplify the supply chain? Can you consolidate suppliers so that you have fewer to deal with (and therefore less bureaucracy and complexity), and have greater buying power? Reduce inventory costs Is there an opportunity to reduce the costs associated with holding stock? Can you switch to a Just-in-Time (JIT) system of ordering from suppliers, can you relocate to cheaper warehousing, can you change the basis on which you pay suppliers? Change workflow (process) How can operational activities be changed to improve effectiveness and efficiency? Ideally you will be able to eliminate some activities, and simplify others - ask if all tasks are really necessary. Look first at those tasks that have greatest impact on customer service levels and make sure they are being performed well, and then focus on high time or high costs tasks to simplify Improve quality What can be done to improve quality and therefore improve customer satisfaction and reduce wastage or rework? Nowadays, quality is a given, and companies that fail to deliver as promised on time and in budget will lose customers Automate or use technology How can technology help? Could IT be used more effectively tom improve communication, management information or integration with suppliers and customers? What processes can be automated in order to improve workflow or reduce costs? Investment will be required, and so you should have a clear estimate of the anticipated return-on-investment Improve skills levels How competent are the team, and would new or improved skills in selected areas impact on performance? Process skills such as decision making, project management or risk mitigation are often critical to growing companies, but don't forget basic admin skills such as typing and time management
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Consolidate facilities What can be done to take costs out of the facilities? Can operations be simplified into one location, should you consider leasing rather than buying, could you co-locate with partners? Consolidate equipment Is the current level of investment in equipment necessary or can it be simplified? Are some machines not being used and simply taking up space and therefore incurring overhead costs? Consolidate roles Can roles be consolidated to reduce the number of people required in certain areas? not only will this reduce costs, it provides an opportunity to get the team to focus on what is really important to success. Look for areas to multi-skill in order to give greater job diversity and business flexibility - this is particularly key in small businesses Reduce finance charges Finally, can the finance charges be reduced - by avoiding credit cards charges, restructuring the business loan, or seeking alternative sources of finance such as private equity
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
Margin Analysis Use the following blank template to address an issue or opportunity within your business or team
Form 1: Analysis Summary Summary Analysis Title
Status Last Update
Description
Status - Costs
Analysis Leader
Status - Revenue
Executive Sponsor
Status - Costs
Form 2: Revenue Analysis REVENUES
Increase in income
I
R1 - Improve fit with customer needs R2 - Increase sales effort R3 - Increase brand awareness R4 - Lower price R5 - Grow the market R6 - Grow the segment R7 - Sell to a new segment R8 - Increase price
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
U
Status
Action
Form 2: Cost Analysis COSTS
Reduction in operational costs or overheads
I
C1 - Improve channel efficiency C2 - Redesign products and services C3 - Reduce product range C4 - Reduce cost of supplies C5 - Reduce supplies complexity C6 - Reduce supplier complexity C7 - Reduce inventory costs C8 - Change workflow (process) C9 - Improve quality C10 - Automate or use technology C11 - Improve skills levels C12 - Consolidate facilities C13 - Consolidate equipment C14 - Consolidate roles C15 - Reduce finance charges
© SofTools, 2009. For more information on related products and services, visit www.Fast-Track-Me.com or contact us at: [email protected]
U
Status Action
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