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Consulting toolkit profit trees
1.
CONSULTING TOOLKIT
Consulting Skills: Profit Trees © 2007-2012 IESIES Development Ltd. All Ltd. Reserved © 2007-2012 Development Rights All Rights Reserved
2.
Profit/ROCE Trees are
used to diagnose opportunities through comparisons of profit drivers across time or other businesses WHAT? Breaking down the key drivers of profitability to a detailed level WHY? •The ROCE Tree shows the key drivers of profitability on one map •They become powerful diagnostic tools when compared –across time –across businesses HOW? 1) Start with ROCE or profit on the left 2) Break down ratios mathematically step-by-step 3) Choose breakdown to highlight key dynamics © 2007-2012 IES Development Ltd. All Rights Reserved
3.
ROCE Trees break
down a business’s return to its profit drivers Market share % Operating 15 10 Income $m Revenue $m 5 0 1,500 '96 '97 '98 '99 '00 1,000 60 500 x ROCE % 40 20 0 '96 '97 '98 '99 '00 Industry sales $m ROCE, % 0 '96 '97 '98 '99 '00 x 15,000 20 10,000 10 Op margin % 5,000 0 0 16 '96 '97 '98 '99 '00 '96 '97 '98 '99 '00 14 12 '96 '97 '98 '99 '00 x (1 - tax rate) % 34 33 32 31 '96 '97 '98 '99 '00 Capital Employed $m 600 400 200 0 '96 '97 '98 '99 '00 © 2007-2012 IES Development Ltd. All Rights Reserved
4.
There are three
tips to gain insight from ROCE Trees •Combine key financial and operational metrics. Like Issue trees, try different cuts to get new insights •Compare across different businesses to see how different business models work to deliver returns •Compare across time to see what drivers caused financial results © 2007-2012 IES Development Ltd. All Rights Reserved
5.
The best way
to learn is to do one yourself…….. CLASS EXERCISE Create a Profit Tree for a consulting business © 2007-2012 IES Development Ltd. All Rights Reserved
6.
ROCE Trees break
down a business’s profit drivers Basket Size Gross Margin $/Transaction Margin % Intensity Store Sales 28.6 $/Sqft/Week 24 $/Store/ Week PROFIT TREE FOR A RETAIL BUSINESS 20.5 Store Sales 19,050 Transactions Contribution Intensity No./Week/Store Rent Intensity $k/Sq Ft/Yr $/Sqft/Week $/Sqft/Week 797 666 49.2 Store Size Sq ft No. stores No. 4.5 388 Store Size Sq ft Store 138 Operating Depreciation Profit $m 388 $/Sqft/Week 27.5 EBIT $m Store SOP Staff cost 0.7 $k/Store/Yr $k/Store/Yr 16.8 83.3 199 Stock Cover Other store Weeks cost Central $k/Store/Yr 13.0 Overheads Pre-tax Stock ROCE $m 26.1 $m % 10.7 Working Purchases 46 Capital 19.9 $m $m 79.7 11.6 Capital Supplier Employed Credit $m $m Fixed Asset Credit terms 36.6 $m 8.3 Weeks © 2007-2012 IES Development Ltd. All Rights Reserved 25.0 5.4
7.
KPIs for a
consulting company are typically Utilisation%, Mark- up Rate and Proposal Success Rate% Mark-up Rate (Billing/cost) [%] PROFIT TREE FOR A PEOPLE PROJECT-BASED COMPANY (e.g. Consulting) Billing Rate [$k/manday] x Number of Projects Profit per Manday _ Average Consultant Cost [No./year] [$k/manday] Effective [$k/manday] Profit (without Consultant Net Profit sales cost) per Project x Cost [$k/manday] from Projects [$m/year] x [$k] Average Project Consultant Utilisation Rate [%] Size Consulting _ Net Profit (inc sales cost) per Project _ [Mandays] Sales Cost Company Annual Profit [$k] Per New Client [$m/year] Proposal Sales Cost per [$k] New Client Won [$k] x Sales Cost Company New Client Per Project Overhead Cost Proposal [$k] [$m/year] Success Rate Repeat/Upsell [%] (1- Project Rate [%] © 2007-2012 IES Development Ltd. All Rights Reserved
8.
You can use
a profit driver tree to understand a company’s economics AIRLINE PROFIT DRIVERS Number of Passengers [No./year] Number of Passenger Miles x [Miles/year] Average Trip Length Net Profit [Miles] from flying [$m/year] x Revenue per Retail Price per Passenger Mile [$/PM] x Passenger Mile [$/PM] Sales Ground Ops Cost per APM _ (1- Commission [%] [$/APM] Annual Profit [$m/year] Profit per Passenger Mile _ Cost per Flying Cost [$/PM] Available Passenger Mile + per APM [$/APM] Cost per [$/APM] Overhead Cost Passenger Maintenance Cost [$m/year] Mile ($/PM) per APM Load Factor [$/APM] [%] © 2007-2012 IES Development Ltd. All Rights Reserved
9.
Netflix profitability is
driven by 6 Key Performance Measures SUBSCRIPTION BUSINESS PROFIT DRIVERS Average (e.g. Netflix) Subscription [$/month] Net Profit from Renting _ Average shipments [No./month] Subscription [$/customer] Average cost/shipment Net Profit from Renting x Cost/Customer [$/month] x [$/shipment] [$m/year] Number of Average Cost Customers per Shipment + _ [No./year] [$/shipment] Fulfilment Net New Customers cost/shipment Marketing Cost [No./year] [$/shipment] Marketing per Free Trial Annual Profit [$m/year] Cost [$m/year] x Acquisition Cost/ New Customer [$/customer] [$/trial] Effective Acquisition Cost per Net New Customer _ [$/customer] Trial Conversion Rate [%] Technology Cost Churn [$m/year] (1- [%] Overhead Cost [$m/year] + Admin Cost [$m/year] © 2007-2012 IES Development Ltd. All Rights Reserved
10.
Netflix profitability is
driven by 6 Key Performance Measures Sell-out share FMCG BUSINESS PROFIT DRIVERS (%) (e.g. Diageo) Market share (%) x Weighted Distribution Sales x (%) ($m/year) Market size ($m/year) Average Price ($/unit) Profit Contribution x Gross margin Mix Effect [$m/year] (%) (%) Annual Profit [$m/year] _ Net margin (%) _ Average Cost ($/unit) Advertising A&P (brand building) (%) Overhead Allocation Investment (%) + Promotion [$m/year] (volume related) (%) © 2007-2012 IES Development Ltd. All Rights Reserved