Regardless of whether your company is large or small, rich in cash or eke out its survival on a tight cash flow, operate with the most sophisticated custom-designed ERP fitted with Cognos or makes do with QuickBooks/Excel combo, if I ask you to pinpoint the exact segments where you lose or make money, most likely the answer is too broad, or intuitive, or incorrect.
Based on my experience, segmental performance is one of the most deficient areas of business analysis. Ok, the larger are probably doing better than the small ones. The latter, unfortunately, are clueless 99% of the time.
Then again, what is your segment? Do we need the Large Hadron Collider to break the business matter into invisible particles? Of course not, but a sensible breakdown can give an invaluable insight and bring about organizational changes. And let me clarify that when I talk about "performance," I don't mean revenues, which are easy to track, I am talking about EBITDA - my favorite indicator.
Familiar to everyone example - CBS Corporation. Its portfolio consists of 23 separate brands (subsidiaries), including CBS Television, CBS News, CW, Showtime, Simon & Schuster, etc. Of course, there are separate P&L's for each of these sub-entities. I am positive, Showtime Networks knows who does better Showtime or The Movie Channel. I am pretty sure they are aware of how much "Dexter," or "Nurse Jackie" contribute to the bottom line. Moreover, thanks to digital counting of viewers tuned in, they know for a fact how much Gross Revenue each episode generates. As I said, that's easy - they know how much they get paid for each subscriber. (Side Note: it's just as easy for the network television, where the revenue is calculated based on the commercial time).
But do they know how much profit (or loss) they make from each episode? ALL costs allocated, including CBS Corporation CEO's salary? What, it is not required by financial statements? We are not talking about them. We are talking about magerial understanding of the business. Is it important? It's fundamentally important. Each episode is written by different writers, directed by different directors, some use more effects and extras than others, etc., etc. This is BUSINESS INTELLIGENCE and those are factors impacting this particular business.
Here is promised CFO Folklore. At some point in my career, I accepted a position in a company with national exposure - 14 operational facilities in different states. They needed me because they couldn't understand why they experienced cash flow shoratges. The first thing I did was the profitability analysis for each of the locations. I uncovered that 9 out of 14, have been consistently loosing money for the past 18 months.
There are, however, inherent difficulties that prevent most financial executives with limited human resources from undertaking this exercise. First of all, it is not easy to properly define your segments. It is pretty much a game of optimization between the level of details you would like to have and the resouces you need to achieve it. The most intense part of the analysis, however, is the selection of proper principles of allocation for all shared costs and the allocation process itself.
The spreadsheet image is courtersy of E&D CC, Inc. If you are looking for help with segmental analysis, I recommend contacting E&D CC - they specialize in assessing reporting needs and designing specific analytical tools related to profitability and costs, as well as budgetary, treasury, viability, forecasting and planning instruments: [email protected]