FTM Business Template - Margin Analysis

Margin Analysis
Business Template
What is a Margin Analysis? When should you use it?

The Margin Analysis template provides a structured Get into the habit of conducting quarterly reviews of
method for identifying and exploiting opportunities the key areas of the business such as high emphasis
for increasing revenues and reducing costs. or high growth product-markets. A key part of this
will be the elimination of costs associated with
Why is it relevant? product or market complexity.
The continuous maintenance and protection of
margins is critical to the profitability of a business or How should you implement it?
product line and provides the free cash-flow Appoint a member of your team to be responsible
necessary for future investment and growth. for the formal analysis on a quarterly basis. This will
not only identify opportunities for improved
Who needs to be involved? profitability, but it will identify ways in which core
Ensure that everyone in your team understands the process can be simplified to improve overall
key factors that drive increases in revenues and effectiveness and efficiency.
reductions in cost. Whilst most will not be Also, use the Margin Analysis tool whenever a new
responsible for overall profitability, the choices that product or service is introduced – this will act as a
each will take on a day-to-day basis will impact on checklist to stop unnecessary cost and complexity
margin. being introduced in the first place.
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Margin Analysis
This is a case example based on a fictitious company called TVT – all the data is displayed for demonstration
purposes only. For a detailed explanation of what each cell is used for please refer to the Virtual Consultant on the
following pages.
Form 1: Analysis Summary

Summary Status
Analysis Title TVT - Margin Analysis Last Update 23-Jan-2009

Analysis of the TVT international
Significant opportunities on both the
Description business for opportunities for profit Status - Costs
revenue and cost sides
improvement
Analysis Leader Andy Bruce Status - Revenue Red
Executive Sponsor Patrick Harper-Smith Status - Costs Amber
Form 2: Revenue Analysis

REVENUES Increase in income or budget allocation I U Status Action
R1 - Improve fit with Closer alignment of current product range to the requirements
9 5 Amber 1
customer needs of local European markets
R2 - Increase sales Initial effort will be in conjunction with strategic partners who
2 5 Green 0
effort will head up sales activities
R3 - Increase brand Potential to have a massive impact but will take time to build
10 3 Red 2
awareness and needs to be based on successful high quality products
The market is highly competitive, but most competitors have
R4 - Lower price 1 1 Green 0
similar price models
The European market is well established, and as a new entrant
R5 - Grow the market 0 0 Green 0
we would have little ability to influence overall market size
A highly differentiated strategy may enable us to expand the
R6 - Grow the
luxury segment - need to make a decision on positioning 6 9 Amber 1
segment
quickly
R7 - Sell to a new This is the major area of potential in terms of taking proven
10 10 Red 2
segment luxury products into new markets
The commodity nature of the market means that there is little
R8 - Increase price 0 0 Green 0
scope of price increase above the general level of competition
Form 2: Cost Analysis
COSTS Reduction in operational costs or overheads I U Status Action
C1 - Improve channel This represents a major opportunity as the current approach of

10 8 Red 3
efficiency going direct is proving costly and ineffective
C2 - Redesign The current product range should provide a reasonable fit but
5 2 Amber 1
products and services packaging may need to be adapted to local markets
C3 - Reduce product Initial market entry will only be via a sub-set of current
0 0 Green 0
range products
C4 - Reduce cost of
Costs will not be a prime driver 0 2 Green 0
supplies
C5 - Reduce supplies There may be opportunities to source closer to International
5 7 Amber 1
complexity markets - this can be explored in due course
C6 - Reduce supplier This may link with supplies complexity and should be assessed
5 2 Amber 1
complexity as part of a formal analysis
C7 - Reduce inventory Need to think carefully about impact on warehousing and
7 10 Amber 2
costs logistic costs - seeking to partner with region logistics groups
C8 - Change workflow Major opportunity to fundamentally redesign all supply chain
10 10 Amber 1
(process) processes
Current products in the luxury range already have an enviable
C9 - Improve quality 0 0 Green 0
position for quality in the market
C10 - Automate or use Integration of logistics with European partners will need a
6 5 Amber 2
technology much greater degree of technology / IT consistency
C11 - Improve skills Need to build experience in selective international markets
5 2 Amber 1
levels and skills in integrated supply chains
C12 - Consolidate There is no intention to own our own facilities in Europe but to
0 0 Green 0
facilities work with strategic partners
The current policy is to lease equipment as required or to work
C13 - Consolidate
with partners - however, there will need to be a review of the 6 2 Amber 1
equipment
IT strategy in due course
Major expansion will result in a fundamental re-evaluation of
C14 - Consolidate
the current structure of both sales and marketing and logistics, 7 5 Amber 1
roles
with the resultant scale economies
C15 - Reduce finance Expansion will be managed through internal 'organic' growth
2 2 Amber 1
charges incurring no finance charges
Virtual ConsultantTM
The Virtual ConsultantTM provides a step-by-step guide to completing this business template. It is worded as a
series of questions designed to make you stop and think about this topic in a challenging and creative way – as if a
business coach or consultant was sitting next to you.
Audit Title
What is the brief title for this analysis?
Description
What is the more complete description of this analysis?
Analysis Leader
Who is primarily responsible for the completion of this analysis?
Last Update
When was this analysis last updated?
Status
What is the current status for both Revenue Increase and Cost Reduction?
 Red = major concerns / opportunities and immediate corrective action is required

 Amber = some concerns / opportunities and needs to be monitored carefully. Future development action may
be required
 Green = no major areas of concern or opportunity
Update
Finally, what is the latest brief update on the current status or progress?
Forms 2 and 3: Revenue & Cost Analysis
Revenues and Costs

What alternative ways are there for improving the financial and operational performance of your business or
team?
Impact
What is the overall impact of each opportunity?
10 = Could dramatically impact on performance and fundamentally change the way in which the business or team
operate to 1 = Marginal operational impact only
Urgency
What is the urgency for each item?
10 = Very urgent and needs to be addressed in the next few days to 1 = Not urgent at all and can be addressed as
and when there is a lull in the current workload
Action
What specific tasks are planned in order to realise the potential for improvement in each area?
Detailed checklist – Revenue Increase
 Improve fit with customer needs

How can you change the design of your products, services or processes to better match the basis on which
customers make their choices? This should increase the amount of products and services sold
 Increase sales effort
What can be done to increase the amount of sales effort in terms of the number involved in the sales process,
the number and quality of the sales team, or the use of sales partners?
 Increase brand awareness
What actions will increase the awareness and liking for your brand in your target market? your aim is to be the
supplier of choice with your target segments, but be aware that supporting a product or company brand can
be expensive in terms of time and money
 Lower price
What impact will lowering the price have. If the elasticity of demand is high, then lowering price may
significantly increase volumes - but make sure it is at an acceptable margin
 Grow the market
What actions can you take to grow the total market so that maintaining your market share will ultimately
increase sales? Few organisations have this as an option and that it is typically only open to market leaders
 Grow the segment
What can be done to grow the segments of the market that you have chosen to focus on? Smaller
organisations can have a greater impact here than trying to grow the overall market. Think about how you
might switch consumers from other segments
 Sell to new segment
Who else might want to buy your products and services? This might be a similar segment to your current
customers, but it might also be quite different. If selling to a new segment, you may need to alter your
products, services of processes
 Increase the price
Finally, what impact would increasing price have? If price elasticity is low, then increasing prices may increase
margins significantly for little loss of volume
Detailed checklist – Cost Reduction
 Improve channel efficiency

What can be done to make current channels or partners more effective and efficient? Should you use other
routes to market, or can you take actions to improve their operating processes?
 Redesign products and services
What can be done to simplify current products and services in order to reduce costs? This typically involves
simplifying he design, or cutting out functions that the customer really does not value
 Reduce product range
Can the product range be simplified by delisting or stopping selected products or services? This will allow you
to reduce some of your overheads associated with servicing the 'tail', but will also allow you to focus on the
top 20% of customers that probably contribute 80% of your revenues. You should not cut off those smaller
products that represent significant future growth or are important to your strategic customers
 Reduce cost of supplies
What can be done to reduce the cost of supplies? Put together a pareto profile of your supplier and focus on
those areas of greatest potential - i.e. are of greatest expenditure. Can you renegotiate the contract, change
supplier or change the part used?
 Reduce supplies complexity
What can be done to simplify the supply chain? Can you consolidate suppliers so that you have fewer to deal
with (and therefore less bureaucracy and complexity), and have greater buying power?
 Reduce inventory costs
Is there an opportunity to reduce the costs associated with holding stock? Can you switch to a Just-in-Time
(JIT) system of ordering from suppliers, can you relocate to cheaper warehousing, can you change the basis on
which you pay suppliers?
 Change workflow (process)
How can operational activities be changed to improve effectiveness and efficiency? Ideally you will be able to
eliminate some activities, and simplify others - ask if all tasks are really necessary. Look first at those tasks that
have greatest impact on customer service levels and make sure they are being performed well, and then focus
on high time or high costs tasks to simplify
 Improve quality
What can be done to improve quality and therefore improve customer satisfaction and reduce wastage or
rework? Nowadays, quality is a given, and companies that fail to deliver as promised on time and in budget
will lose customers
 Automate or use technology
How can technology help? Could IT be used more effectively tom improve communication, management
information or integration with suppliers and customers? What processes can be automated in order to
improve workflow or reduce costs? Investment will be required, and so you should have a clear estimate of
the anticipated return-on-investment
 Improve skills levels
How competent are the team, and would new or improved skills in selected areas impact on performance?
Process skills such as decision making, project management or risk mitigation are often critical to growing
companies, but don't forget basic admin skills such as typing and time management
 Consolidate facilities
What can be done to take costs out of the facilities? Can operations be simplified into one location, should you
consider leasing rather than buying, could you co-locate with partners?
 Consolidate equipment
Is the current level of investment in equipment necessary or can it be simplified? Are some machines not
being used and simply taking up space and therefore incurring overhead costs?
 Consolidate roles
Can roles be consolidated to reduce the number of people required in certain areas? not only will this reduce
costs, it provides an opportunity to get the team to focus on what is really important to success. Look for areas
to multi-skill in order to give greater job diversity and business flexibility - this is particularly key in small
businesses
 Reduce finance charges
Finally, can the finance charges be reduced - by avoiding credit cards charges, restructuring the business loan,
or seeking alternative sources of finance such as private equity
Margin Analysis
Use the following blank template to address an issue or opportunity within your business or team

Summary Status
Analysis Title
Last Update
Description
Status - Costs
Analysis Leader
Status - Revenue
Executive Sponsor
Status - Costs
Form 2: Revenue Analysis

REVENUES Increase in income I U Status Action
R1 - Improve fit with

customer needs
R2 - Increase sales
effort
R3 - Increase brand
awareness
R4 - Lower price
R5 - Grow the market
R6 - Grow the
segment
R7 - Sell to a new
segment
R8 - Increase price
Form 2: Cost Analysis
COSTS Reduction in operational costs or overheads I U Status Action
C1 - Improve channel
efficiency
C2 - Redesign
products and services
C3 - Reduce product
range
C4 - Reduce cost of
supplies
C5 - Reduce supplies
complexity
C6 - Reduce supplier
complexity
C7 - Reduce inventory
costs
C8 - Change workflow
(process)
C9 - Improve quality
C10 - Automate or use

technology
C11 - Improve skills
levels
C12 - Consolidate
facilities
C13 - Consolidate
equipment
C14 - Consolidate
roles
C15 - Reduce finance
charges

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FTM Business Template - Margin Analysis

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Margin Analysis

What is a Margin Analysis? When should you use it?

Form 1: Analysis Summary

Analysis Title TVT - Margin Analysis Last Update 23-Jan-2009

Form 2: Revenue Analysis

C1 - Improve channel This represents a major opportunity as the current approach of

Form 1: Analysis Summary

 Red = major concerns / opportunities and immediate corrective action is required

Forms 2 and 3: Revenue & Cost Analysis

Revenues and Costs

 Improve fit with customer needs

 Improve channel efficiency

Form 1: Analysis Summary

Form 2: Revenue Analysis

R1 - Improve fit with

R5 - Grow the market

C10 - Automate or use

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