Baseline Performance – Essential Element #1
Baseline Current Performance is the 1st of 8 articles based on:
“Profit Improvement Planning Blueprint: 8 Essential Elements for Underperforming or Distressed Companies” – Post dated Feb 24, 2024
Baseline Current Performance – Essential Element #1
Baseline Performance - Essential Element #1
The “Current Baseline” becomes the foundation of the profitability improvement/turnaround plan. It reflects the “As Is” state of the business, providing a clear picture of its financial and operational performance and will serve as the primary reference point throughout the effort to enhance profitability.
It starts with the current P&L
Building a solid financial baseline usually begins with the current Profit and Loss (P&L) statement. While the P&L offers valuable insights, it frequently masks critical revenue, cost and profit drivers due to factors including, but not limited to, absorption accounting limitations, balance sheet considerations, reporting errors and insufficient granularity in reporting.
Enhanced by Additional Analyses
To overcome these limitations and uncover hidden opportunities to boost profitability and performance, it’s beneficial to incorporate additional analyses and business intelligence often readily available within the organization. This could involve examining market and customer profitability, assessing product profitability, reviewing Activity-Based Costing (ABC) analyses and correcting known reporting errors. Leadership’s insights will likely guide and accelerate efforts to identify and address reporting gaps and errors. (note: avoid overthinking and becoming ensnared in analysis paralysis; the goal is to be directionally accurate versus overly precise)
By incorporating these additional analyses within the P&L, the business is better positioned to:
- Identifying immediate cost control efforts (Essential Element #2)
- Pinpoint areas for significant financial improvement (Essential Element #4)
- Develop a more realistic Profitability Improvement Plan (Essential Element #5)
- Reallocate resources
Summary and Benefits
Overall, developing this type of comprehensive financial baseline better positions a business to maximize the value of its profitability improvement efforts.
Additionally, this type of data-driven approach enhances credibility, validates assumptions and deepens awareness of cost structures and revenue drivers. It establishes a solid foundation for future decision-making, prioritizations and performance improvement planning and implementation.
Finally, remember that this is only the first step in the profitability improvement journey. In future articles, we will demonstrate where and how to use this information to prioritize efforts, forecast future performance and identify the changes that are most likely to have a rapid, significant and sustainable impact on financial performance.
* * Essential Element #1 Summary from Original Article * *
1. Baseline Current Performance - Essential Element #1
Understanding the current situation is critical to driving sustainable positive change. It acts as the guiding compass for the organization’s assessment of market, customer, product and service offering profitability.
While the current Profit and Loss (P&L) statement provides a starting point, further analysis is typically required to uncover hidden opportunities. Delving deeper allows the organization to unearth underlying causes, validate improvement avenues and anticipate potential challenges.
Pro Tip: This stage can consume considerable time and resource – delaying needed profitability improvements. A baseline that is directionally “accurate” versus “precise” is sufficient as it will likely contain estimating errors and inaccurate assumptions, which will need correction as they manifest.
