Profit plus Cost is Revenue

We have seen the business planning happening majorly as ‘Sales Planning’. In other words we can say that it is the ‘Revenue’ planning. Based on the planned revenue and returns expected the ‘Cost Budget’ is targeted. With the equation ‘Revenue – Profit = Cost’. The pressures are majorly on the costs. With this pressure the management as well as the line managers try to cut costs which is nothing but cutting expenses (read as ‘resources’). Activity Based Management (ABM) helps to understand the ‘non-value added’ activities and those can be scrapped with reducing the expenses and resources can be freed to perform the customer facing activities. This would in turn help to maintain the ‘Customer Value’.

Instead of starting with revenue if we can start with the profit expected by the management, then understand the market situation to bring that profit. With this study we can understand our product offering, their pricing, our customer segments, their requirements, competition etc. With this understanding we would be able to build our business strategy comprising of ‘what to sell’, ‘whom to sell’ and ‘how to sell’. This will help the organization to understand their current business processes and the plan the future one. This planning would define the activities to be performed and the resources requirement for the same. This information can be converted into cost budgets. What we know now is profits plus the costs, and the sum of this should be the revenue that needs to be brought in. Based on this information we can break down the revenue into various products, customers, channels, prices, geographies etc. Based on this a detail sales plan can be defined and monitored further.

In recent past various organizations are using ‘Balanced Scorecard’ as their performance planning and managing methodology. In this methodology organizations define their ‘strategy map’. Based on this map and the strategic objectives various KPIs are defined. Among those are the cost related and profit related KPIs. While defining this strategy map and the KPIs, if we can use the ABM models where in we can create various ‘what-if’ scenarios based on various options that the organization may have to achieve their ultimate goal, then the organization can choose the strategic path that is matching with their ROI targets. This is based on the assumption that the strategy map (by itself) does not give the numbers that can be achieved. But the ABM scenarios can help the organization to understand the impact of various actions on the profitability. Before choosing a path the organization can understand the effects of their future action converted into bottom line.

I have posted this with few assumptions and I would be interested in getting the feedback from readers on at least following questions (more than that is always welcome);

1) Is this concept already used by the organization?

2) If yes,
a. What type of industry is using?
b. In which geography this organization is?
c. How useful is this?
d. What are the challenges faced?

3) If no,
a. Does this sound practical?
b. In which type of industry this would be helpful?
c. What are the lacunae?
d. What type of alternatives can be used?

4) Any other comments (for or against), as this will make us the concept understand better.

You can post here or send me an email at rajenpatil12@gmail.com