Cost Volume Profit Analysis

There are tons of tools out there which Product Managers can use to help make themselves dangerous – for good and bad. Over the years, one of those which I’ve found most useful is Cost Volume Profit analysis or CVP.

I’ve had the chance to exercise this tool at two of my four previous employers and am just now getting down to brass tacks with it for my fifth company. In those cases in which I could use it, it was effective. In those cases in which I didn’t get the chance to utilize it, I wished I had.

CVP is a simple tool that allows you, as the master of your universe, to really dig into the effects of changes to your business. Whether those changes are among the multitude of cost components you can manipulate or efforts on the marketing and sales side relative to revenue generation and subsequent profitability, CVP can help you determine which levers to pull to optimize your business.

One tremendously important benefit of CVP is that it allows you to quickly conduct “what if” analysis on your concern. For instance, what if this component of my fixed cost increases? What are the ramifications to my volume and profitability in terms of break-even points or profit targets? If I discount the price of my product, by how much will the sales volume need to change to break even or get ahead? Are my sales channels and manufacturing pipeline capable of managing the volume change needed? Is the market sufficiently large enough to produce the sales volume I need to meet desired targets?

There are few things more clarifying to the decision making process than quickly and effectively running sensitivity analysis on your business, demonstrating the outcomes required to maintain equilibrium, and assessing whether or not your organization can manage those changes to hit desired profit targets. Incidentally, this kind of analysis is particularly useful when working with a sales force unaccustomed to price discipline in the field.

Maybe CVP will be useful to you, then again maybe it won’t. Having had the chance to spot check it in real life across a couple of industries and a few companies, I’ve found it’s at least worth a look.