Improving Profitability Requires Clarity and Communication

The Profitability Analytics Framework is designed to improve communication across an organization and breakdown organizational stovepipes with data and information that can be universally understood. How? Fundamentally by putting an operational model of value creating, support, and administrative resources and processes “front and center” for the organization. The PA Framework advocates that monetary models be built to reflect operations…that means without the machinations and distortions required by financial reporting standards and regulations. Causality is fundamentally based on the resources and processes that perform operations, tasks, activities, etc. Resources (of all types human, equipment, etc.) can be and should be traced in operational quantities first; then monetary information is collected and applied to reflect the operational quantities. If quantity information have the characteristics of fixed and variable, then the money must have the same characteristics. Additionally, money may need to be modeled as a cash flow or as an economic impact (a sale that must be collected, wear and tear leading to capital replacement, idle capacity that is paid or incurring costs but not in active use, etc.)

The goal is to make communication clear and straight forward and make the economic reality of the business clear to everyone. This works best if money matches operations in a clear cause and effect way. Stovepipes often exist because different parts of the company look at different systems and data to make decisions, and performance is often measured from those different systems. If the systems and data aren’t understood across the organization, the lack of understanding creates an environment for conflict and miscommunication. Putting the operational model of the organization’s resources and processes in the forefront of decision making can go a long way toward fixing these problems.

I hope one lasting benefit of the remote work situation brought on by the COVID pandemic will be a fundamental understanding of the need for greater visibility of systems, data, and performance metrics across organizations. Working remotely, and hence more independently, is enhanced with consistency and visibility of the data used throughout the organization and greater understanding of how each individual contributes to strategic goals. Systems, data, and performance goals that are clearly and deeply understood and visible across the organization create an environment for teamwork and innovation. Profitability Analytics’ focus on operations is designed to facilitate this understanding and create and environment and culture where profitability is the most likely outcome of everyone’s efforts.