Consulting toolkit profit trees

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Consulting toolkit profit trees

  1. 1. CONSULTING TOOLKIT Consulting Skills: Profit Trees© 2007-2012 IESIES Development Ltd. All Ltd. Reserved © 2007-2012 Development Rights All Rights Reserved
  2. 2. Profit/ROCE Trees are used to diagnose opportunities through comparisons of profit drivers across time or other businessesWHAT? Breaking down the key drivers of profitability to a detailed levelWHY? •The ROCE Tree shows the key drivers of profitability on one map •They become powerful diagnostic tools when compared –across time –across businessesHOW? 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. 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 xROCE % 40 20 0 96 97 98 99 00 Industry sales $mROCE, % 0 96 97 98 99 00 x 15,00020 10,00010 Op margin % 5,000 00 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. 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. 5. The best way to learn is to do one yourself……..CLASS EXERCISECreate a Profit Tree for aconsulting business © 2007-2012 IES Development Ltd. All Rights Reserved
  6. 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 OverheadsPre-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 $m 8.3 Weeks © 2007-2012 IES Development Ltd. All Rights Reserved 25.0 5.4
  7. 7. KPIs for a consulting company are typically Utilisation%, Mark- up Rate and Proposal Success Rate% Mark-up Rate (Billing/cost) [%]PROFIT TREE FOR A PEOPLE PROJECT-BASED COMPANY(e.g. Consulting) Billing Rate [$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] [$m/year] Success Rate Repeat/Upsell [%] (1- Project Rate [%] © 2007-2012 IES Development Ltd. All Rights Reserved
  8. 8. You can use a profit driver tree to understand a company’s economicsAIRLINE PROFIT DRIVERS Number of Passengers [No./year] Number of Passenger Miles x [Miles/year] Average Trip Length Net Profit [Miles] from flying [$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. 9. Netflix profitability is driven by 6 Key Performance MeasuresSUBSCRIPTION 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] [$/shipment] Marketing per Free TrialAnnual Profit [$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 [$m/year] © 2007-2012 IES Development Ltd. All Rights Reserved
  10. 10. Netflix profitability is driven by 6 Key Performance Measures Sell-out share FMCG BUSINESS PROFIT DRIVERS (%) (e.g. Diageo) Market share (%) x Weighted Distribution Sales x (%) ($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

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