Having a profitability model built for your business will enable you to understand the impact of changes in areas such as:
- Labour Rate Adjustments – what it means if you increase the hourly rate of your employees by $0.50 an hour
- Material cost changes – know the impact of accepting a price increase, or negotiating a discount from a key supplier on your overall profitability
- Overhead cost reductions – understand the impact big system changes or hiring more administration staff may have on your overall business
In addition to understanding the nuances of your business, profitability models can also be used to forecast the next 1 or 2 years of your business operations. Customer growth, pricing changes, and hiring plans can all be factored into the model so you know what your business will look like a year from now.
Benefits of a profitability model:
- Creates a detailed understanding of the revenue sources and costs of your business
- Enable forecasting of major initiatives and overall profitability
- Allows you to create “scenarios”, to understand the impact of various business decisions