Dear all,
If revenue increased, but profit decreased, can we conclude that cost must have been increased? what are other possibilities except for increase in taxes, interest, etc?
Profitability question
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Hi there,
yes, that's the logical inference you can draw, given Profit = Revenue - Cost.
To investigate further, you can break down the cost into its key drivers (varies by company / industry) to pinpoint the problem, followed by targeted root cause analysis.
Feel free to reach out, if you'd like to learn more about how to approach this systematically.
Regards, Andi
(edited)
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Hi there,
I would be happy to share my thoughts on it:
- That is correct. However, what is way more interesting is the root cause of the problem, which might very well still be revenue-related (e.g., changes in product mix from higher- to lower-margin products) or cost-related (e.g., higher fixed costs due to increased production volume).
If you would like a more detailed discussion on how to address your specific situation, please don't hesitate to contact me directly.
Best,
Hagen
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Profit = Revenues - Costs
If profit is down, then cost increased more than revenues. There are no other possibilities (taxes and interest are costs).
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Hi there,
Yes, logically speaking the hypothesis is that there's something wrong with the costs.
The next step would be to go deeper into the costs to figure out what the problem is. Based on the case type/prompt, you can divide cost into:
1. variable/fixed
2. direct/indirect
3. by type of product
4. by type of market
5. etc. - try and get inspired as much as possible by the sort of information that you were provided in the prompt.
1-2 tend to be the classic structures, but if you can think of something more insightful, that's better.
Best,
Cristian
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Hi there,
Correct! Then, of course, for a real case there will be much more subsequent analysis.
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I would also dig deeper into the segments that grew as potentially total revenue grew but for the product or client segment with the lowest margin. So it does not necessarily mean that costs have increased but potentially product mix.
Hope that makes sense
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