Does your profit and loss statement look like this?
*If this statement were generated from your accounting system, the Selling, General and Administrative expenses (such as management salaries, rent, sales compensation, advertising/promotion, utilities, etc.) would be presented to you in detail. For purposes of this article, detail of those items have been suppressed.
What does the above P&L tell you?
Sales have decreased while labor costs have increased as a percentage of sales from 21.5% to 26%. Cost of goods have moderately increased year to year. The SG&A expenses have exploded; a detailed look at the individual components of the SG&A will determine the culprits there. The company has experienced almost a $100,000 decrease in bottom line performance year to year.
Some more analysis is in order. Why, for example, have the sales decreased while the cost of goods and cost of labor increased (both of the latter as a percentage of the sales)? Did new competition come into your market? Is your product not as competitive as it once was? Did you have to cut your price? Did you lose a customer(s)? Were there supplier price increases that were not passed along to customers? Did scrap/rework increase during the year? Did the staffing in production not get adjusted to the sales environment? Did employees get pay raises even though it was a down year? That does not even address the rapid rise in the SG&A portion of the P&L.
If this company is selling one product/service at the same price and cost to everyone through the same market channels and distribution logistics, this level of analysis gives a good overall snapshot of the venture's dynamics. The absence of profit—or very little profit—might even be acceptable if ownership is paying itself 8% to 10% of the revenue. This kind of firm is often referred to as a "lifestyle business".
The Magic of the SBU
The example above is what we call a "simple" business, or a "single Strategic Business Unit (SBU) business.” The single SBU business is one which has only one group of customers who buy in a similar manner products and/or services in a fairly narrow price/cost range. An example of a simple, single SBU business might be a tax preparation service catering only to individual federal, state and local tax returns.
In most cases, what is described above does not resemble fiscal reality and does not reflect how the business actually is constructed. Even if the products/services are sold at the same price to everyone, this level of analysis does not permit inspection of the real costs of the sale. If, for example, some sales are made via an Internet store, chances are that those sales carry lower overall selling and transaction costs than bricks and mortar sales do. It is also likely that deals are routinely struck to give price or terms breaks to larger transactions and/or key customers, and sales margins per unit are not all alike.
The SBU concept has been in place for several decades. General Electric under Jack Welsh, for example, treated each of its businesses as SBUs and evaluated performance and investment decisions by viewing each business as a group of SBUs within those businesses. If it worked for GE, might it not be worth considering in your business?
Accounting systems that lump all sales into one summary line miss the boat in helping to try to figure out how you make money and where you are making money. Similarly, that same bundling of labor and/or materials costs does the same disservice in your quest to determine the real costs and benefits of a given product/service.
Because most businesses aren't really simple (and that includes those which appear on the surface to be simple), SBU structure and analysis is the best way to account for differences and similarities in key components of the firm—especially groups of products/services offered to different groups of customers.
SBU structure helps to figure out the real areas where you make money. Different matches of products/services, priced incorrectly, for example, lead to under-performance of the firm.
Because most businesses in reality are not simple single business businesses, the next article in this series will help explore different ways to help create SBU structure for making better, more informed decisions to improve performance and for establishing criteria for making decisions to move the company forward into the future.
Jeffrey C. Susbauer, Ph.D. is Associate Professor Emeritus at the Monte Ahuja College of Business, Cleveland State University where he has taught strategic management and entrepreneurship courses since 1970. A long-time consultant to scores of businesses, a member of the boards of advisors to over 60 companies, he co-founded and serves as the principal instructor for the COSE Strategic Planning/CEO Development Course for the past 36 years. The course is concerned with providing entrepreneurs with education to guide their vision, strategic thinking and execution in their businesses.
Want to learn more about the Strategic Planning/CEO Development course? Click here for additional information or contact Jeff via email.