People go into business to make a profit, provide themselves with an income and a comfortable way of life. That’s a given. But sometimes the reality doesn’t match the theory, and the business is not profitable. Even where a profit is not the aim, such as charities, the balance between income and expenditure must avoid a negative figure.
There can be many reasons why a business is struggling to produce a profit, but getting to the core issue may be difficult. Analysing a large company that has a profit issue is complex. There are a lot of moving parts, from suppliers, staff, and premises to investors.
Breaking the problem down into smaller, more manageable components is the key to understanding what is happening and finding the solution.
Using problem-solving tools such as Issue Trees and the Mutually Exclusive, Collectively Exhaustive (MECE) method, segment the problem and allow you to find a solution much easier.
Profitability issues are also used as training tools in business schools, and very often during case interviews. The same tools are useful in those settings, and we are going to explore the profitability case interview in more detail.
Case Interviews and Profitability Problems
Case interviews used to be rare outside management consultant circles, but they are now far more widespread, particularly in the finance sector. Capital One is a prime example of this, and tech firms such as Google have also adopted the practice.
The idea behind them is to test a person’s problem-solving and communication skills, using a real-life example sometimes. At the interview, you are given a problem scenario and asked to find a solution. It’s a conversational style interview, where you presented with a lot of data and charts. Finding the answer is not the aim, but how you get there and communicate with the interviewee most certainly is.
If you are interested in a management consulting role, then practising case interviews and particularly profitability is essential.
Profitability is Prime Case Interview Material
Contracting a consultancy business to work with your company is expensive, so, understandably, many will only do this if they can improve their profitability.
This reasoning makes financial issues one of the most frequent jobs for consultants, so using them during the recruitment stage makes sense. Profitability issues appear a lot in case interviews.
There’s Help Out There
Preparing for a case interview takes time and practice, but fortunately, a whole separate industry has grown around these needs. You’ll find plenty of online resources, books, coaches, and courses.
Coaching lessons may sound extreme for a job interview, but when you consider how competitive the market is and the rewards on offer, it’s easy to see why many take this route.
A quick internet search will bring up masses of free material to learn from, including text, videos, and examples of case studies. The majority of this will be for management consultants, but the fundamental methods taught are also relevant to anyone heading for a case interview. Note that tricks for consulting math will be especially useful in making your calculations quickly.
The basics of profitability
At a basic level, generating a profit is simply a case of making sure your income exceeds your expenses. Easy, yes? Well, no, not really, otherwise companies wouldn’t employ expensive consultants to help them with profitability.
To really understand why a company is or isn’t making a profit, we need to break down the income and expenditure into components. For example, there are fixed, and variable costs and each of these can be segmented into sub-components. Similarly, income has multiple sources that each need to be considered separately.
Break the Problem Down
Splitting a complex problem, such as profitability, into smaller components is known as segmentation. But where do you start to segment the problem? There may be many different ways of looking at the information, and they could all be equally valid.
With a complex problem such as profitability, the real cause may be masked by the segmentation choices you make. Often, the fundamental problem may be from a specific part of the business which your segmentation process did not expose fully.
For example, consider a train operator that is struggling with profitability. An obvious way to break down the problem might be by the routes the company offers or maybe by the class of tickets they offer, such as comfort or standard.
If the company is losing money on the comfort class of tickets, dividing the company’s offerings by route will not find the problem. Using ticket class as the segmentation will clearly expose the issue.
In the train example, both segmentation routes were perfectly valid, but only one would have discovered the underlying issue.
When considering profitability issues, you very often need to try different segmentations to find the root cause of the problem.
Find the Solution
Taking the time to consider the different ways to segment a business is the first step to cracking the profitability issue and finding the root cause. Time spent at this stage is crucial to understanding the business model but requires creativity on the part of the consultant.
Finding the root of the problem is not necessarily the key to finding the solution. In business, there are many factors outside the company’s control, and simply eliminating the problem may not be possible.
Taking our train example again, we may discover the rising cost of electricity was causing the profitability issue with the comfort tickets. We can’t remove the problem, as without power our trains are going nowhere, and of course, the cost is fixed.
To bring comfort tickets back into profitability, we will need to find other cost-cutting measures. Once the problem is identified, the same methods can be used to explore possible solutions.
Practice, Practice, Practice!
We can’t say it enough. The only way to improve your problem-solving abilities is to, well, solve problems! If you can find a friend to help you practice, that’s even better.
If you are considering a career in management consultancy, then profitability problems will most certainly feature in your day to day work. But first, you need the job, and you will very likely face a case interview based on profitability.
Start practising now, using as many real-life examples as possible, and it will put you ahead of the competition.