Many organisations are not able to achieve the targeted profits due to various factors contributing to the erosion of profits. Hence an analysis on those factors and understanding the drivers of those factors that cause negative influence on profits is essential in order to address them in a timely and suitable manner. The factors that can affect profit margin can be analysed on two categories as under: Gross Profit Margin Net Profit Margin
The stakeholders are generally interested in the above two margins as the result of the analysis will throw light on areas of concern to enable them to take their decisions for the future course of actions. For example, an increase in sales due to cut in price may cause reduction in gross profit margin. Likewise, the analysis will reveal the money-losing produces or services offered during the period, so that corrective measures can be taken to improve the gross profit margin by either reducing the sales of those items or use the production of some other profitable items as the case may be.
Budgeted profits may not be achieved due to various uncontrollable factors. Hence a further analysis to identify the controllable factors to understand their effects margin is necessary. The impact of loss of profit due to the various factors can be known by addition of the relevant percentages of Gross Profit and Net Profit actually achieved. The recast of Profit and Loss account adjusting the effects of controllable factors but not controlled would make the business realise the impact of inefficiency built in the system and will demand action for improvements.
