Not Using a Profit Potential Analysis May Be Dangerous to Your Wealth

This article reveals how to determine the profit potential from product lines, operating departments, and company divisions.  As part of a series of articles that explain methods to evaluate business profitability and tools used by the accounting firm of Lawson, Rescinio, Schibell and Assoc, P.C. to assist their clients to become more efficient and profitable.

A tool we utilize called the Contribution Margin Approach is very vital in analyzing the profitability of various segments of a business, Eg; business departments or product lines, as used in various industries such as construction, automotive, marinas and various others. In utilizing this method, a financial statement is prepared dividing revenue by either product lines and or departments defined as revenue sources. Within the divided categories all expenses must be categorized and divided into fixed and variable. The fixed expenses of the Company are pooled and put aside because they have no effect on this type of analysis.  The variable expenses are defined and allocated to the various categories of revenue sources.

A spreadsheet is developed in revenue source order with the related variable expenses resulting in a contribution margin by revenue source, either positive or negative. The negative means that the revenue source is not contributing to the profitability of the company and to overhead coverage. This revenue source requires careful attention as to its future benefit to the company, should the company drop the product line or department for a more profitable revenue source. Each profit center must be analyzed as its benefit to the company.

As mentioned above the fixed expenses are not part of this type of analysis because the basis of the Contribution Margin Approach is to determine the profitability of the product lines and how they contribute to absorbing the fixed costs and contribute to the overall Company profitability.

Sal Schibell was founding partner of Lawson, Rescinio, Schibell & Assoc. P.C., CPAs . He is a graduate of Monmouth University and Fairleigh Dickenson University where he received an MBA degree and a Masters in Tax Law. He holds CPA certificates in both New jersey and New York, a Certified Financial Planner®, Personal Financial Specialist and Chartered Global Management Accountant designations ‘

To learn more about this approach contact Salvatore Schibell at 732-539-7328.