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MENTORING - Fundamentals - P&L analysis 2 - Coggle Diagram
MENTORING - Fundamentals - P&L analysis
2
A company should always maintain three things for good revenue. (a) price; (b) volume; (c) margins.
Some businesses are price games. Some are volume games. Some are margin games.
For example. Apple does not have to run behind numbers. That is automatic. What it has to monitor and manage is price. It should always ensure that it has a leadership price.
Whenever there is an opportunity in a market, all players after getting that information will buzz around that product. Completion always first happens at the price.
Some businesses focus on price as competition happens there. This is generally important for commoditised products. Means products where there are many players.
Some businesses focus on volume as competition happens in volume there. This is generally important for niche products where volume brings much money.
Some businesses focus on margins. These are the businesses where volume game alone does not bring money. But lower expenses change the game here. Hence they depend on margins. That means for them the question is whether to forgo margin or aim for higher margin.
Revenue = Price * Volume. So for companies that focus only on price and volume, where expenses do not change the game much, the above two are the key variables.
But for companies where expenses are crucial, margins become a very important focal point. That is when focus on expenses becomes very very important.
The relation between price, volume and expenses is unique and they are joined at the hip, called margin.
Revenue = price of finished good
volume, Expense = price of raw materials and other expenses
volume
A good business will always try to allocate the costs (or expenses) to its revenue. If it cannot allocate, that means it is not doing a good business of tracking its revenue well.
Great companies are very good at keeping a tab on expenses. Not only that. They can allocate costs stupendously.
So profit is the difference between revenue and expenses. Great companies are good at aiming for revenue growth but at low cost. High cost growth is okay but not great.
What are the different kinds of profit. There are three types of profits: (a) gross margin; (b) operating profit margin; and (c) net profit margin.
Before discussing gross margin, we will discuss the types of expenses.
There are four types of expenses: (a) fixed, (b) variable, (c) direct and (d) indirect.
A company that maximises gross profit by controlling fixed expenses and indirect expenses is said to have a greater operating leverage.
A company that gets hurt at gross profit or operating profit by uncontrollable indirect expenses and fixed expenses is said to have a poor operating leverage.
Real money focuses on companies with great operating leverage.