Want to learn a quick and simple way to read your business profit from a financially efficient way? You might be one of those large proportion of small companies that lost thousands of dollars when looking only at ‘the whole picture’ and ignoring the micro, and you just didn’t notice.
What you are about to read is the outcome of my 20-years+ experience as a finance professional working and advising multinational companies and local large businesses in several countries, so I guarantee you this is not going to be boring, at all.
All you need is logical thinking, a bunch of enthusiasm an just intermediate knowledge on spreadsheets (or someone who give a hand on this). No complicated and expensive ERPs (systems).
Why does my business need a ‘Profit-per-brand’ model ?
According to statistics published by the Small Business Administration, a government office in the US (www.sba.gov), a significant proportion of small businesses fail in their early years because of, among other reasons, the so-called ‘poor management’ in which I include the ‘whole picture’ view of the business and ignoring how critical the micro-finance is impacting your performance. I will put it simple: Let us say your revenue portfolio is composed by 10 brands with a variety of sales volume, margins, distribution and post-sell costs. By the end of the month your finance department has provided you the P&L figures and you are celebrating because all your goals (sales, cost, expenses and -more important- bottom line) where achieved, on top of a comfortable growth versus last year. And so your marketing and sales people get paid and everyone around is happy for the results. That’s nice.
But the above is a reality I have seen so very often: In-betweens are dangerous, as there are brands that can be eroding value to the business, either by generating losses or perhaps profits below the desired level and the same could happen when you think of your customers portfolio, a reality that you hardly see if you don’t pay attention to micros. The reason for this is quite simple: Indirect cost and expenses. Easy-to-understand examples of that are customer service expenses, post-sale service departments, distribution and logistics and administrative. You pay them all to serve the entire company so they don’t work for a single unit, brand or customer.
Then the only way to avoid losing money is to ‘allocate’ all those indirect expenses to see where we earn and where we lose benefits, which we will achieve only by establishing a simple model to see a P&L (from revenues to EBITDA and Net Results or post-tax, post-finance costs) for each of our brands, or at least for those that are more relevant. And of course the next and obvious step is to make decisions on what we want to sale and what we want to de-list.
Some may argue that they already know how much they profit from a brand: ‘I know my margins as I know how much I pay my suppliers and of course I know my price to customers’. But I get them convinced how wrong they are with this only question: Do our shareholders receive margins or do we need to spend beyond that line of the P&L before they get paid ?
Step 1: Get your brand portfolio “prioritized” and think it strategically
The first step of this model is to be clear of what is relevant and what is not, based on strategic reasons. The portfolio of our brands and categories should be grouped into three main roles: Core brands, Flankers and Cash-Cows. In order to assure long-term success and sustainability of the way we will manage our portfolio, it is a must that these roles are agreed at the highest level of the company: Close discussion and agreement by Marketing, Sales and Finance directors. Missing only one of these guys will mean lack of commitment at management /lower levels and therefore a high risk of fail.
Core brands: Are the fundamentals of our values and our strategy, and which we want to grow and to gain the largest market share possible and they are usually the highest profitable brands in our portfolio. Nevertheless, the strategy could agree that at some point in time, either at the beginning of their lives or at a given moment, some of the core brands will not be profitable due to long-term reasons like the need of extensive innovation investment that are key to the success of a brand, or perhaps a re-launch that will need significant advertising and promotional costs. But of course it is obviously expected that that is a temporary moment in the life of a core brand.
Flanker brands: Once we have set out our strategic portfolio, we now need someone who will be willing and ready to defeat them from competitors entering a strategic price-range, and this is the role of a flanker. They are brands that are aimed to be less profitable than the core but play a key role in the portfolio and they are often of lower quality and lower prices than the core and destined to play clear roles versus specific competitors in specific categories in clear geographies and markets. To learn more about this topic and to gather some good examples, I recommend a study published by Iowa State University in 2010 (see link below) by Nancy Giddens and Amanda Hofmann.
Cash-cows: A third group of brands are those that don’t fall into any of the other two groups, but we want to maintain as they bring some sort of ‘supplement’ to some categories or they may be a key to enter some markets and customers with other core brands. It is clear for us that all we want is to get from these brands as much cash as possible; so these brands are profitable as long as we don’t invest significantly in ad and promo. This should be the last category and I would expect there be no brands without a category of these three: The role has to be clear, otherwise there is no reason for a brand to exist.
If you’re asking yourself what this section is for as we are to build financial numbers, my answer is that in order to be able to set solid and logical financial goals for our brands we must understand what their role in the strategy and the portfolio is and that is just what we do when we perform the step # 1. But beyond numbers and analysis, this is in itself a good exercise to get finance people involved closer to the business and thus get them prepared to accompany the business in the journey to success.
Step 2: List all expenses and cost that are not-brand-direct
Once your portfolio is clearly set and agreed at the 3 parties level I have recommended above, then it’s time to list all those expenses that ordinarily are not specific to a brand. These expenses are, as I mentioned before, typically related to logistics, distribution, customer service and post-sale, and administrative but there could be more so your finance /accounting team can be of great help here. Again, finance /accounting people can give a hand on this.
Step 3: Agree how will you “charge” your brands (criteria)
Another key component of this model, is to agree the so-called ‘Allocation Rules’, which means a criteria on which we will base to ‘charge’ the cost or expense to each of our brands in the portfolio. The criteria can be set on a wide range of alternatives and they will depend on the type of business we are in but you can pick some of these examples:
– Sales volume: either $ or tons, units, pallets, thousands of cans, etc.
– % of time that a certain area usually renders to a brand or category (or to a customer or group of customers who distribute our brands), according to records a given area keeps
A good practice is to make a final check that you have taken all your COGS (cost-of-goods-sold) and SG&A (sales-general-administrative expenses) versus what you usually have reported in your total business P&L.
Be careful to consider expenses that are indirect although they are not centrally incurred, e.g. regional units located outside the headquarter country or state.
Step 4: Timing and Reporting rules
Now it’s time to agree the ‘views’ we will give to the analysis by answering the following questions:
– Do we want to compare versus prior year ?
– Do we need to compare to our budget ? (I assume you know how important planning and budgeting is for the business). Bear in mind what could be obvious: Should you want to compare to a budget, then you need to have a budget that complies with this request, that is, structured and organized on a P&L per-brand basis. For starters, I would suggest to see only actuals versus prior year and let the budget for a 2nd level once you and your management team has adapted themselves to the new way of measuring the business.
– Do we want to see all our brands or only the core and the flankers ?
– Who are the main destinations ? Will we share this strategic and sensitive info with all around ?
In the event that your business has operations in several states or countries, you may consider splitting the analysis according to these needs but that will of course add complexity on calculations and reporting so you may want to leave this action for a second stage of implementation.
Another key point to consider is to have someone responsible for this analysis who will also play a role of partnering to Marketing and Sales departments so that they understand and learn how to read the figures, reinforce the ‘allocation rules’ as well as providing them supplementary /additional information to explain what is impacting either positively or negatively the overall results of a brand or category. When it comes to finance, the responsibility is to timely provide information others find accurate and useful to make decisions.
Step 5: Action and get the opportunities !
It will be useless all the effort we will put into setting up the model if we don’t follow up or we don’t use all this information to make decisions. So bear in mind the following recommendations:
– Set up a period and date to report and discuss at appropriate level. Quarterly rounds are usually effective
– For every round there should be specific actions agreed: Some examples of actions can be: A brand manager will explore /analyze the volume mix per SKU on his /her brand which is affecting the overall brand revenues so that he will identify what to de-list and where to raise prices. Logistics will propose some actions to reduce shipping cost per ton on a brand that has been affected by high cost of transportation.
Some good practices I have seen when implementing a profit per brand model:
– Top management is committed and engaged with the new brand profitability scheme. They publicly reinforce the need of measuring performance at this level on group meetings and key company events
– Marketing managers are held responsible for the full P&L, from revenues to EBITDA. They will present quarterly results to the Board and their brands profitability is just a view of their overall personal performance
– When launching a new brand or category, P&L per brand is a critical part of the ‘go’ requirements and check list
– Agree a link between management pay and brand profitability objectives. Clear goals of profit per brand
– Benchmarking your numbers versus your peers, at the available level
– Set goals to improve your last year in a specific target (x%) for current year and next 3-5 years
– Establish ‘stop-loss’ limits for a brand or category. This should lead to hard decisions on a low-performer
– Relevance to the model is paramount and we invest in IT capabilities to expand and improve the P&L per brand structure
– The state-of-the-art models are based on an appropriate ERP (transactional system) and cost and benefit centers coding structures
Hope this tool helps to improve your business. Your comments are highly appreciated at [email protected]