Have you evaluated your business for efficiency, competitiveness, profitability, and profits lately?

Introduction

Organizations, from small businesses to major corporations, face many common challenges. In addition to finding professional staff and the requisite skills to function effectively, these entities’ biggest problems are developing a comprehensive range of systems and programs to maintain strict monthly reporting, auditing, and evaluations. Unlike product development, manufacturing, and services, the critical requirement for these surveillance systems is often overlooked. However, this oversight can have serious consequences, leading to a loss of competitiveness and profitability for the business for efficiency or corporate entity.

To run a successful business, you must effectively utilize all the business resources. Some business managers and owners downplay the importance of monthly review of variance (ROV) and yearly audits, focusing mainly on tedious yearly financial reporting, as they need help promptly completing their annual financial reports to various regulatory agencies. However, it’s crucial to understand that these monthly reviews and yearly audits are not just tasks to be completed, but vital tools for maintaining the health and stability of your organization.

It is not unusual for a small business or corporate entity to be determined as theoretically feasible but practically viable, particularly juggling multiple projects—forecasting deliverables and receivables. Likewise, striving to balance Accounts Payables and Receivables (P/R), at the same time being vulnerable to significant challenges in running a stable organization free of day-to-day frustrations —typically of these eight business challenges:

EIGHT TYPICAL BUSINESS CHALLENGES

1. Capital Financing Needs
2. Estimating and Scheduling
3. Budgeting and Cost Management
4. Managing Multiple Projects and Priorities
5. Forecasting and Launching New Products
6. Delivering on Expectations

In today’s complex and competitive environment, business as usual is not good enough. Small companies and mega-corporations can only afford to have these challenges become an ongoing roadblock to their business’s efficient functioning. Whether conducting research, developing systems, manufacturing a product, or delivering a service, you are managing a project, program, or portfolio of programs. To stay ahead in this competitive landscape, you must institute some fundamental project management methodologies concurrent with business management approaches.  

Figure 1 (below) introduces the concept of Business Management underpinned by Project Management as the most critical “value-added” integration interface between Project Cost Management and Business Accounting Management. This integration acts as a “force multiplier,” a term from physics, which means a factor that can increase the effectiveness of a system. In the context of project and business management, it signifies that the integration of project management methodologies can significantly enhance the success of your projects and business operations.

CRITICAL INTERFACE BETWEEN PROJECT COST MANAGEMENT AND BUSINESS ACCOUNTING MANAGEMENT

In Article 4: Project managers play a dual role in managing projects that should ensure a higher layer of successful financial management. For instance, they employ Cost Engineers and Cost Analysts as the first critical level of engagement in establishing the budget preparation in estimating the project expenses, undergirded by these ten representative elements:

1. Timelines (target/milestone dates)
2. Elapsed time versus real time
3. Task relationships (including float)
4. Priorities (scale 1 – 10)
5. Capital financing (including contingency)
6. Resources (inclusive)
7. Constraints (inclusive)
8. Risks (internal and external)
9. Deliverables quality/quantity)
10. Storage (where applicable)

While these ten criteria may not be the common language in financial accounting, understanding and integrating critical aspects of project management into the business management space significantly increases the probability of business success. This knowledge empowers you to grasp how these elements impact cost and budget, making Cost Accounting Reporting more than just abstract numbers. It becomes a true representation of the business’s feasibility, viability, growth, stability, and sustainability. [1]

Furthermore, in this article, we take a deeper dive into the highest’ value proposition’ of the application of principles of Review of Variance (ROV), which is applied stringently as a critical tool in monthly project reviews. In Business Accounting, ROV is typically applied across the financial transactions of the business entity. However, project management professionals who practice consummate project management, would often recommend taking a monthly snapshot across all aspects of the projects or businesses. Financial reporting is only one aspect of comprehensive business reporting. The benefits of ROV are critical to project and business cost management. It is the ‘force multiplier’ for successful cost and financial management. Following is a sample listing of seven critical items for monthly business and project status reporting:

SEVEN CRITICAL ITEMS FOR MONTHLY ROV EVALUATION

1. Cost Flow versus Cash Flow Variance (by cost centre)
2. Business or Project Budget Variance (as applicable)
3. Business or Project Contingency Variance (as applicable)
4. Business or Project Milestone Variance (as applicable)
5. Resource (inclusive) Threshold Variance (by category)
6. Quantity and Quality Variance (by deliverables)
7. Risk Assessment Variance (by category)

This sampling of seven critical items for monthly ROV evaluation comprises the foundation for understanding the monthly status of a business or project. They include ongoing business and project viability, the second pillar in the five foundational pillars for business development (see Figure 2.). A viable business provides business managers with the highest guarantee of profitability.

However, profitability at the corporate level is not always a sure indicator of the next three business objectives as follows:

1. Business Growth
2. Business Stability
3. Business Sustainability    

Whether business owners and managers are astutely aware, they manage a portfolio of programs, projects, or products at some level. Hence, it is essential from the onset to clearly understand how the services, products, or projects are structured, financed, and managed within their accounting management systems. Regardless of the nature of the business entity, profits and profit margins are the lifeline to growth, stability, and sustainability. Therefore, using profitability measures and a profitability index to guide investment entities is not just a tool, but a reassuring one that can instill confidence in your financial management decisions. These specialized skills require project management and business consultancy that business owners and managers can employ and institute within their businesses.

THE BUSINESS DEVELOPMENT STRATEGY

Figure 2 above mirrors the Business Planning Strategy depicted in Article 3, Figure 1, and the Business Success Strategy depicted in Article 4, Figure 1. The distinction among these three articles focuses on Development, Planning, and Execution. Often, business owners and managers approach their businesses generically. However, considering these three crucial imperatives provides an approach to better understanding the path to business success. 

Notwithstanding, each article and the representative figures focus on continuously evaluating and enhancing your business policies, processes, and procedures to ensure maximum potential for business and project success. Moreover, adopting and implementing proven business and project management best practices throughout the organizations to mitigate challenges, particularly, most notably:

1. Cost Management
2. On-time Delivery
3. Quality Control

The success of achieving these three criteria provides the highest level of confidence, not only in the success of the individual business but also in the success of the entire organization, which translates to profitability. Profitability is necessary for planning and forecasting future growth, stability, and sustainability of any business. 

PROFIT, PROFITABILITY INDEX, AND PROFITABILITY

PROFITABILITY INDEX

The profitability index (PI) is used to assess how much profit may come from a particular investment. Although not that common among finance professionals, as opposed to NPV and IRR and, it is still considered economically sound. Governments and NGOs normally use this index when performing capital analysis. [2]

PROFITABILITY AND PROFIT

Although the two terms are used interchangeably, profitability and profit are not the same. Both are accounting metrics that are used to analyze the financial success of a company, but there are distinct differences between the two. To adequately determine whether a company is financially sound or poised for growth, investors must first understand what differentiates a company’s profit from its profitability. [3]

Many businesses, particularly small business owners, are generally unable to determine profitability at a rudimentary level on a monthly or quarterly basis. Having some quantifiable level of knowledge of business profitability enables business owners and managers to respond systematically to their future business operations (short and long-term), especially when they are managing multiple products or services of the business.

Often, profitability and a profitable business can be a double-edged sword. Some business owners use their profits to rapidly expand their businesses as first imperatives as opposed to building financial contingency and the necessary infrastructure to ensure the future growth, stability and sustainability of the business, for example:

CRUCIAL BUSINESS INFRASTRUCTURE

1. Buildings
2. Facilities
3. Utilities
4. IT (hardware and software)
5. AI Infrastructure
6. Business and Project Management
7. Human Resources (training and development)

Although the seven representative strategies above solidly guarantee success in the three major components in Figure 2: Item 3, 4, and 5, still some small, medium, and large corporations, with a high margin of profits and profitability may also follow a path of business expansion, mergers and accusation. For some organizations, either paths can become a “dilemma” for the business entity if they fail to do the appropriate analysis.

Hence, it is crucial for business owners and managers to have an empirical understanding of the profitability and profit of each product or service. Moreover, to understand market trends, customer needs, and business competitiveness. These factors are critical in making decision for prioritizing and determining which product or service contribute more favorable to the goals and objectives of business and the “bottom line.”

CONTACT INFORMATION

Dunn, Pierre, Barnett & Company Canada Ltd
First Canadian Place
100 King Street West
Suite 5700, Toronto, ON
M5X 1C7, CANADA
Cell: 647-966-4783  Fax: 416.915.4260
Email: jpierre@dpbglobal.com Email: cjustinepierre@gmail.com
Website: http://www.dpbglobal.com

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Footnotes

[1] Article 4: An Integrated Project and Business Management Perspective —A Critical ‘Value Chain’ For Businesses Success in The Twenty-first Century.

[2] 365 Financial Analysts: All the online financial courses you need (https://365financialanalyst.com/knowledge-hub/corporate-finance/what-is-profitability-index/).

[3] Investopedia: The Difference Between Profitability and Profit: By: Melissa Horton. Reviewed by: Thomas J. Catalano. Fact checked by: Vikki Velasquez (Updated August 07, 2024) (https://www.investopedia.com/ask/answers/012715/what-difference-between-profitability-and-profit.asp).