As a business owner or investor, it’s important to easily understand the top profit streams within a given industry. In other words, it pays to have a visual depiction of an industry’s most lucrative operational segments by operating margin. Fortunately, this is easy to do, thanks to built-in features in Excel. Let’s learn how to do a Profit Pool Analysis in Microsoft Excel.
How to Do a Profit Pool Analysis in Excel
Before starting to build and perform a Profit Pool Analysis, it’s very beneficial to understand the mechanics behind this type of analysis. As mentioned above, an analysis such as this will typically cover a given industry. For example, a Profit Pool Analysis could be performed for an industry like consumer appliances.
The analysis itself is a visual depiction based on operating margins. Keep in mind what operating margins are. Operating margins are found by dividing operating income for a given process or industry by the associated revenue value. In accounting and financial applications, the operating margin helps explain how efficiently processes are operated. Higher margins represent a larger “cut” left over for a company or industry after covering the associated expenses in a process.
Operating margins, factor heavily into a Profit Pool Analysis. The entire goal of the analysis is to derive a better understanding of a particular industry. For leaders and investors alike, this offers benefits that are two-fold. Namely, it helps illustrate where a particular industry segment sits on a sliding scale of profitability. This lets you identify how multiple, varying operating segments relate to one another. This can reinforce or challenge your competitive position, based on the analysis outcome.
Secondly, the Profit Pool Analysis delivers valuable insight around competitive opportunities. For example, you may perform the analysis and realize that the most profitable industry segments aren’t those that your firm competes in. It follows from this that you may have new opportunities to explore, in order to capture the most lucrative segments.
With this foundation in mind, you can now begin to build a Profit Pool Analysis inside Microsoft Excel. The best technique is to first create a simple grouping of data on your worksheet. Once again, the primary analysis input needed here is the profit margins for the various segments in the industry that you’re working to analyze.
Begin by listing the segment names in a column. Here, we’ll use column A as an example, beginning with cell A2. Then, you’ll need to list the operating margins in column B.
Keyboard these into place, and quite quickly, you now have the framework to perform a Profit Pool Analysis.
With the data selected, you’ll be able to add a visual chart for your analysis. To begin, select the range of data that you just inputted. Here, the range to select is A1:B5.
Then, click on the Insert tab on Excel’s ribbon. On it, you’ll see the Charts group near the center.
For a basic Profit Pool Analysis, it pays to keep things simple. Click on the Column dropdown, then choose Clustered Column from the 2-D Column group.
Excel will automatically insert your Profit Pool Analysis chart. Take a look to see what it means. On the vertical axis, you’ll see that the operating margin values are measured. Each of the vertical bars represents a different segment of the industry.
As you can see, it’s easy to do a Profit Pool Analysis in Excel. At a glance, you can process financial data and determine the strongest segments in any industry that you choose to study. This drives opportunities and helps fuel future expansion endeavors, even as it helps you manage risk.