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Chapter 7 Defining a Business Scenario for Profitability Analysis

Financial statements are widely used as the “report card” for business. Financial statements follow rules of accounting and are supposed to communicate to the reader a description of results in categories that drive a business. The income statement is a lens for analyzing the earnings of a business. This chapter will examine the income statement in accounting terms and how it falls short of providing critical analytical information to make decisions. You will be introduced to a more detailed analytical approach to understanding the profitability drivers of your business that we call the direct variable profitability (DVP) model. The example company information will illustrate data elements to consider when analyzing drivers of profitability and compare that visibility to what you see in the traditional accounting income statements.

The DVP Model will allow you to better understand the drivers of profitability of your business and prioritize resources to manage those drivers. This approach can be used in any business for any reporting period. Use of the DVP model is restricted only by the tools that you have available to access data in your systems.

The Profit and Loss Statement

It’s likely that you have seen what is commonly called a profit and loss statement (P&L) or an income statement. A P&L statement defines profit as being equal to revenue (sales), less all costs and expenses. Seems fairly straightforward; ...