3 Ways to Visualize Your Profits
There is an old business aphorism, "you can't manage what you can't measure." While not terribly accurate as a statement of fact (we must manage many intangible, immeasurable aspects of our particular business), the statement works as an exhortation to measure key business drivers better.
In a similar vein, we might say, "you can't understand what you can't visualize." As strategic advisors we put a lot of effort into different ways to show key business drivers (e.g., sales, growth, margin, asset utilization, etc.) in easy-to-understand graphics. Thus we can bring to life the opportunities and challenges a business faces.
Here are three different profitability graphics we routinely create.
1. Waterfall charts (aka Mekko or Marimekko charts)
A waterfall chart is a plot of revenue on the X-axis and profit margin (i.e., profit as percent of revenue) on the Y-axis, rank-ordered from highest- to lowest-profit product, geography or customer.
With these charts you can easily see which parts of the business are highly profitable, which ones are near breakeven or average, and which ones are struggling with profitability. We also color code common groups of products or customers (e.g., large customers one color, medium and small customers other colors) so that we can get a visual sense for which groups are on the left or right sides of the chart.
2. Walk-forward charts (known [confusingly!] in some circles as waterfall charts)
We often use walk-forward charts to compare the profitability of one segment to another, or to compare profitability from last year to profitability this year for a particular segment. Often there are two or three key drivers of profit performance among customers, such as price, product mix and cost-to-serve. To make the chart clear, we often color the negative bars differently from the positive bars.
A chart like this can really highlight the business drivers of differences in performance between segments. Big negative or positive profit drivers can really stand out in this view.
3. Revenue vs. cost charts
A different way to compare profitability between segments is to look at revenue per unit vs. cost per unit for each segment. In the chart below you can see that we use a mark above each bar to show revenue per unit in the segment, and we stack several bars for the various costs required to serve the segment.
In this graph we can quickly compare the differences in revenue per unit across segments and simultaneously compare the differences in cost per unit. In the example above, our lowest-price segment is actually very profitable because the cost-to-serve in that segment is well below average.
Charts like all of these above can often tell the story of your business in a very compelling and easy-to-visualize way. If you need to convey what is working well in your business and what areas need improvement, charts can help you deliver the message.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.