Is Your Line of Business Profitable?

Anyone who owns or runs a business knows if they are profitable or not. They look at the P/L at the end of the month and to see if the bean counters show that all revenue exceeds all expenses for the period producing "earnings". This may not be the true profitability of your "line of business" or LOB. The question is compounded if you happen to have more than one LOB.

I have often come across companies that report profits but upon closer examination the profits reported differ from what the LOB's produce. Measuring the profitability of a LOB aligns all of the products, services and overhead for related products that serve a particular industry or customer base. Provided the accounting esteem collects the appropriate data on material, labor and overhead cost it is then possible to measure the LOB profitability.

In a single LOB company it is not uncommon for administrative overhead or corporate overhead to include more cost than is really used by the LOB. This may be due to general inefficiency or intentional misuse by senior leadership or owner for services that are not really related to the LOB. Consequently the company may be profitable with the LOB bearing a heavy overhead allocation or worse the company may be unprofitable when the LOB is profitable. The risk here is that the LOB may be starved of critical resources so that overhead services can be continued.

An extreme example of this was a multi LOB business model where two of the lines were producing LOB profit in excess of 10% while the third and most capital intensive had a loss of 15%. The consolidated profit was 5% and termed "a good profit" by the ownership. Upon further examination the third, capital intensive, LOB had significant issues without he pricing model of work performed, an understanding of what the loading factor of the equipment should be to be profitable, and when it was "profitable" to add additional equipment to the business. These "weaknesses" would not have been revealed had the LOB profitability of a profitable company's not investigated.

Make sure your LOB's are profitable and that your consolidated profit is the accumulated totals of those profits!!