Nishita Bhardwaj
Development of Profitability Reports at Planray Oy
Bachelor of Business Admin- istration International Business Autumn 2021
Author: Bhardwaj Nishita
Title of the Publication: Development of Profitability Reports at Planray Oy Degree Title: Bachelor of Business Administration
Keywords: profitability, Microsoft Power BI, Microsoft Excel, visualization, profitability ratios, real-time data, dynamic reports, V-development method.
This thesis focused on developing and visualising profitability with the help of Power BI at Planray Oy. The aim was to create dynamic reports based on real-time data to support profitability analysis and measure- ment.
Planray Oy, a trace heating automation company in Kajaani, Finland commissioned the thesis. Microsoft excel was used to create profitability reports in Planray Oy for over 25 years. The problem with Excel reports was the static behaviour and difficulty in analysing the hidden data. The maintenance of Excel reports was high as well since it required manual updates on a weekly basis. This development thesis tackled the re- search problem and provided a better solution in relation to the expectations of the client.
Theory of profitability, financial statements, and visualizations was addressed in the thesis. Through the deeper understanding of the topic, it was possible to identify the most significant variables for the profita- bility measurement.
The thesis included an interview with the managing director of Planray Oy. The purpose of the interview was to understand the reasons behind shifting from using excel to Power BI for developing profitability reports as well as the requirements and expectation from the Power BI reports. A section of the interview also focused on the profitability measurements and their visualizations.
The thesis was based on a development research approach and hence, V-development method was used to create the reports. V-development method comprised of the perfect process flow needed to create the specific reports for Planray Oy. By following the V-development method, the process was conducted effi- ciently.
Final profitability reports were developed at the end of the process, which solved the limitations of excel and provided greater opportunity for analysis to the stakeholders of Planray Oy. The final result was based on real-time data to provide accurate measurements and included dynamic visualizations for easier under- standing of the topic.
The reports were used by the management team at Planray Oy and future recommendations on improve- ment of the reports were also provided by the author.
This thesis has been a great deal of work for me and seeing it being completed is quite hard to believe yet. There were a handful of circumstances while working on this thesis, but I am glad to overcome them all and finally see my work in its final shape.
I would like to thank my supervisor Sami Malm for his extreme patience with my circumstances and for making everything work out. This would not have been possible without him. I also extend my gratitude to Toni Piirainen, the managing director of Planray Oy and the whole Planray team for being my support from the first day and always treating me with so much care and respect.
I also want to say thank you to my Mama, Papa, and brother for being there and supporting me emotionally when I needed it the most. Last, I just want to say that tough time may never last long, but it definitely affects you for long and hence it is all our responsibility to find positivity and the will to see those times through.
I hope the readers find something valuable while reading this thesis and I am always happy to answer questions one may have.
Abbreviations
BI Business Intelligence
MS Microsoft
DAX Data Analysis Expressions
P/L Profit and Loss
List of Figures
Figure 1: Break-Even Point Graph (Break-even analysis, 2011) ... 7
Figure 2: Clustered Bar Graph (Chartio, 2019) ... 15
Figure 3: Line chart (Medium, 2019) ... 15
Figure 4: Scatter plot (Shmoop, 2021) ... 16
Figure 5: Stacked Area graph (Study.com, 2021)... 17
Figure 6: V-Development Process (Clarus Concept of operations, 2005)... 22
Figure 7: Profitability margin and profitability ratios for the year 2020 ... 28
Figure 8: Profitability ratios for the year 2020 ... 29
Figure 9: Sales and profitability margin for the year 2020 ... 29
Figure 10: Profitability margins compared to sales for the year 2020. ... 30
Figure 11: Profitability ratios for the year 2020. ... 31
Figure 12: Equity and loans of Planray for the year 2020. ... 32
Figure 13: Equity ratio of Planray Oy for the year 2020. ... 33
Figure 14: Net working capital ratio for the year 2020 ... 34
Table of Contents
1 Introduction ... 1
2 PROFITABILITY AND VISUALIZATION ... 3
2.1 Definition ... 3
2.1.1 Profitability Factors ... 3
2.1.2 Profitability Concepts ... 5
2.2 Profitability Measures ... 6
2.2.1 Break-Even Analysis ... 6
2.2.2 Return on Assets (ROA) and Return on Investments (ROI ... 7
2.2.3 Profitability ratios ... 8
2.3 Financial Statement Analysis ... 10
2.3.1 Profit and Loss Statement ... 10
2.3.2 Balance Sheet ... 11
2.4 Profitability Visualization ... 13
2.4.1 Visualization Tools and Cues ... 14
3 DEVELOPMENT METHODS AND IMPLEMENTATION ... 18
3.1 Planray Oy ... 18
3.2 Qualitative Interview ... 19
3.3 Development Tools ... 20
3.3.1 Microsoft Power BI... 21
3.3.2 V-development Method ... 21
3.4 Development process ... 23
4 RESULTS ... 26
4.1 Reliability ... 26
4.2 Validity ... 27
4.3 Profitability Measurements ... 28
4.4 Profitability Measurement Visualization ... 30
5 CONCLUSION ... 35
6 References ... 37
7 List of Appendices ... 42 7.1 Qualitative Interview Questionnaire ... 42 7.2 Formulas for calculating the profitability ratios ... 43
1 Introduction
For a long time, the success of a business has been measured with its profitability, i.e., the ability to generate profit and return over its investments. Examining and measuring profitability is highly significant to maintain a sound market standing and attract potential investors. Microsoft Excel has been used as the measurement tool for calculating profitability for the past three decades.
However, with the advancement in the information technology field, Microsoft Excel faced some limitations in its operations. Thus, Microsoft introduced Power BI as a modern and advanced tool for business analysis and reporting.
Power BI enables its users to calculate, visualize, and analyse meaningful information to under- stand the hidden problems, make data-driven decisions, and evaluate the business on a dynamic level. Power BI has also become popular among small and medium-sized businesses (SMEs) for analytical purposes because of its easy to use and understand features.
Planray Oy is an industrial trace heating automation company in Kajaani, Finland. They used Mi- crosoft Excel for profitability analysis for over 25 years, but it was noticed that Excel could not keep up with the digital development. After recognising the need for better profitability meas- urement and analysis, Planray Oy used Microsoft Power BI to develop profitability reports for the company, including real-time data and dynamic visualisations, accessed by all stakeholders. It was focused more on the data presentation in the profitability reports, as data visualisations help in identifying trends and deeper insights. Planning, developing, implementing, and maintaining the profitability reports are further explained in this thesis.
The goal of this thesis is to develop Power BI reports to measure, analyse, and visualize profita- bility based on real-time data. The reports should assist in managerial decision making and cross- sectional analysis.
The research problem of this thesis is the static behaviour of the profitability report developed with the help of Microsoft Excel. The reports were based on historical data and cannot provide hidden insights. Excel reports also require regular maintenance, incurring prime time, energy, and money consumption. To tackle this problem, profitability reports are instead developed with the help of Microsoft Power BI. This research explains the significance of profitability measurement
in a company and how Power BI help present the information on profitability in an easy to under- stand and analyse manner.
The research strategy of this thesis is based on development research approach and V-develop- ment method is being used for creating the profitability reports. The development needs and profitability measurement variables are specified with the help of a qualitative interview organ- ised between the managing director of Planray Oy and the developer. Draft dashboards are then designed, tested, and improved over time to create the final version of profitability reports in fulfilment of the pre-defined needs and expectations. Regular maintenance is agreed for the re- ports to keep them updated and reliable.
In the end, the author reflects on the experience and comments on the development of profita- bility reports with the help of Power BI, and its impact on Planray’s administration flow.
2 PROFITABILITY AND VISUALIZATION
This chapter defines the meaning of profitability, the factors profitability depends on, the univer- sal profitability concepts, and the numerical financial measures used to calculate profitability in a business. An analysis is then conducted on the financial statements used to calculate profitability.
Lastly, profitability visualization and its significance for efficient analysis are defined.
2.1 Definition
Profitability is the primary aim of all existing businesses and can be defined as “a business’s ability to use its resources for generating revenue over its expenses” (Hofstrand, 2009, C3-24). It is sig- nificant to measure the current profitability, compare past profitability and project future profit- ability in all businesses in the long run.
Profitability is closely related to profit, but there is a key difference between the two. Profit is the net amount earned by a business after deducting all the expenses from its revenue. Profitability is an accounting metric used to determine a company’s profit in relation to the size of the busi- ness. Profit can be explained as an absolute measure, while profitability can be defined as a rela- tive measure of how profitable an enterprise is. It also implies that a profitable business is a busi- ness receiving profit, but the opposite is not always true (Horton, 2019, n.p.).
2.1.1 Profitability Factors
A company’s profitability can be affected by various factors depending on the size of the firm and the industry it operates. Costs of production and product life cycle are closely related to the busi- ness profitability scope. A product’s life cycle can be explained in four stages: introduction, growth, maturity, and decline. Introduction is the stage where investments are made in advertis- ing and campaigning to make an upcoming product known to its target population. The stage of growth involves increased demand, production, and expansion of the product in the market. Ma- turity is the stage where the product is most profitable and starts facing competition and in
decline, new substitute for the products are introduced in the markets, resulting in less sales and profit. Profitability can be optimized by focusing on the product’s production and advertisement in the stages of growth and maturity (Levitt, 1965, n.p.). While production costs and profitability are negatively related to each other. The higher the cost of production is in a company, the lower is the profitability. Regular maintenances in production process also plays a major role in increas- ing the costs and decreasing the profitability (Alsyouf, 2007, pp 70-78).
Competition is also negatively related to the market, meaning the less competition generates more profit for the business and vice versa (Glen, 2001, pp 247-253). Market contestability, i.e., the freedom of entry and exit in a market, is another significant factor that allows the price re- duction and lower profit because of top competition in certain industries.
Brand image is another important factor proportional to profitability. A good brand image signif- icantly affects customer satisfaction and customer loyalty. Loyal customers are more likely to re- purchase the same service or brand, provide a positive word of mouth among their peers, and willing to purchase premium service offered by their favorable business. By focusing on improving brand image, there is a greater chance of forming long-term loyal relations with the customers and substantially increasing profitability (Adeniji, 2014, n.p.).
Market share maintains a strong relationship with profitability as well. Market share can be de- fined as a percent of total sales in an industry generated by a particular company. Market share is calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period. Market share maintains a positive relationship with a business’s profitability (Szymanski, 1993, pp 1-18).
High profitability is also achieved in periods of economic growth as the markets are dominated by development, enterprise optimism, and confident decision making. In return, high profits en- sure greater corporate growth in the next cycle making growth and profitability as two compli- mentary factors (Geroski, 1997, pp 171- 189).
Hence, profitability depends on various factors depending on the type of industry, the products and services offered, and the business operations. Profitability determinations are a wide concept and thus, it is crucial to define specific measures to calculate profitability for reliable results.
2.1.2 Profitability Concepts
Profitability is defined by various concepts both numerically and non-numerically, depending on the type of business, their mission statement, customers, products, investments, and much more.
Conversion Rate Optimization (CRO) is a significant concept in the realm of profitability. Conver- sion rate optimization (CRO) is the art and science of persuading site visitors to make a purchase and convert into customers. CRO uses a various of techniques, including persuasive copywriting and credibility-based web design, to convert prospects into buyers. Such actions, help in increas- ing sales, revenue profit, and ultimately profitability. The business becomes more visible among prospects as well, making opportunities for future sales (Andrew, 2017, pp 1-5).
Customer Retention is another important profitability concept dependent on the ultimate user of the product and service offered by a business. Customer retention refers to the ability of a company to keep its customers over a specific time period. The higher the customer retention is, the higher the chance of increased revenue (Vroman, 1996, pp. 88-90). In today’s customer-cen- tered economy, companies understand that keeping and keeping customers is the key to a prof- itable business.
Investors observe the earning per share in a company as it provides an idea of the current and future profitability scope to the investor. Earnings per share (EPS) measure the amount of a com- pany’s net income that is theoretically available for payment to the holders of its common stock.
A company with a high earnings per share ratio can generate significant dividends for investors or can be used as an investment for further growth of the business and generate more profits (Fernando, 2021, Investopedia).
Financial institutions inspect the solvency in a business to determine its creditworthiness. Sol- vency is a company’s ability to meet its debts on both short-term and long-term basis. Solvency is important for the continued functioning of the business. It is also presumed that if the debts have regularly been paid off, then new loans can be sanctioned for research and development, and bigger projects, which increases the profitability reach in the business. (Ibendahl, 2016, 195- 201).
2.2 Profitability Measures
It is important for companies such as Planray Oy to regularly analyse their profitability to evaluate their overall efficiency and performance. The widely accepted key measures to calculate and de- termine profitability are break-even analysis, return on assets (ROA) and return on investments (ROI), and profitability ratios.
2.2.1 Break-Even Analysis
Break-even analysis refers to the point in a business where the expenses are net equal to the revenue. Break-even analysis shows the amount of product units that must be sold to cover the fixed and variable costs of production (Tsorakidis, 2011, pp 5-7).
A business can only experience profit once the break-even point has been reached and the sales continue. There are three pieces of information needed to calculate the break-even point in a business, namely fixed costs, variables costs, and sales.
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that must be paid by a company, independ- ent of any specific business activities. For example - rental lease payments, salaries, insurance, property taxes, and depreciation (Hayes, 2021, Investopedia).
A variable cost is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company’s production volume; they rise as production increases and fall as production decreases. Examples of variable costs include the costs of raw materials and packaging (Kenton, 2021, Investopedia).
Revenue, often referred to as sales, is the income received from normal business operations and other business activities (Griffin, 2014, Investopedia). Break-even point is defined where sales are net equal to the fixed and variable costs combined.
Figure 1: Break-Even Point Graph (Break-even analysis, 2011)
2.2.2 Return on Assets (ROA) and Return on Investments (ROI
Return on Assets (ROA) - Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea of how efficient a company’s management is at using its assets to generate earnings. ROA is displayed as a percent- age, the higher the ROA the better (Rist, 2014, n.p.).
Return on Assets (ROA) = Net Income/Total Assets
Return on Investment (ROI) - Return on investment (ROI) is a financial metric that is widely used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. It is as useful in evaluating the potential return from a stand-alone investment as it is in comparing returns from several investments. An annual return rate of 10% or more is a good ROI (Rist, 2014, n.p.).
Return on Investments (ROI) = Net profit before Tax/ Capital Employed
2.2.3 Profitability ratios
Profitability ratios are a type of financial metric that are used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’
equity over time, using data from a specific point in time (Hayes, 2021, Investopedia).
Profitability ratios represent a business’s ability to transform sales to profit, while return ratios represent a business’s ability to generate a return for its shareholders and their investments.
(Goel, 2015, pp12-14). Profitability ratios include gross profit ratio, operating profit ratio, EBITDA ratio, and net profit ratio.
Gross profit refers to the rest of the revenue after deducting the expenses directly related to production of goods for sales, also known as cost of goods sold (COGS) (Beers, 2020, In- vestopedia).
Gross profit = Sales–COGS
Gross profit ratio is calculated by dividing the gross profit with the total revenue. The obtained value can then be multiplied by 100 to get the gross profit margin.
Gross profit margin = Gross profit/Revenue*100
Operating profit is the total earnings got from the core business functions for a period, excluding the deduction of interest and taxes. It also excludes any profits earned from ancillary investments, such as earnings from other businesses that a company has a part interest in (Author, 2021, In- vestopedia).
Operating Profit = Gross Profit - Operating Expenses - Depreciation and Amortization
Operating profit ratio is calculated by dividing the operating profit with the total revenue. The obtained value can then be multiplied by 100 to get the operating profit margin.
Operating profit margin = Operating profit/Revenue*100
The acronym EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
EBITDA shows how much of a company’s net sales is left when the company’s operating expenses are deducted (Chen, 2021, Investopedia).
EBITDA = Operating profit + depreciation and amortization expenses
EBITDA ratio is calculated by dividing the EBITDA with the total revenue. The obtained value can then be multiplied by 100 to get the EBITDA margin.
EBITDA Margin = EBITDA/Revenue*100
Net profit is the net amount of revenue remaining after deducting all costs and expenses. Net profit margin is one of the most important indicators of a company’s overall financial health (Mur- phy, 2021, Investopedia).
Net profit = Revenue - COGS - Operating expenses - Other expenses – Interest - Taxes
Net profit ratio is calculated by dividing the net profit with the total revenue. The obtained value can then be multiplied by 100 to get the net profit margin.
Net profit margin = Net profit/Revenue*100
Profitability ratios are commonly used for measuring profitability in a business, and the results are determined to be reliable and valid. Several companies set their profitability ratio goals at the beginning of the financial year and analyze the outcomes over time to check their improvement and make plans for further development.
2.3 Financial Statement Analysis
Profitability is numerically derived from the financial statements of a company. Financial state- ments, also referred as financial reports, are the written formal records of the financial activities and performance of a company, person, or entity (Murphy, 2020, Investopedia). The financial statements include profit and loss statement (P/L statement), cash flow statement and balance sheet. However, only P/L statement and balance sheet are used for profitability measurements in this dissertation and hence following sections define the components of both the statements.
2.3.1 Profit and Loss Statement
An income statement is a written record and one of the financial statements which shows an organization’s revenue and expense over a period. It is often referred to as profit and loss state- ment (P/L statement) or statement of revenue and expense. An income statement helps to cal- culate net profit or net loss for a specific course of time. In large corporations, income statement is also used to show ‘earning per share’ or EPS (Griffin, 2014, Investopedia). The key components of a profit and loss statement are revenue, cost of goods sold, operating expenses, non-operating expenses, and profit or loss.
Revenue refers to the total amount of income generated from the sale of products/services in a company during a specific time span. Revenue can be divided into three types: operating revenue, non-operating revenue, and other income (Cadden, 2012, Investopedia). Operating revenue is generated from the sales of a business. Non-operating revenue is generated from the other busi- ness activities such as dividend on investments. Last, other income is money gained from the non- business activities such as selling spare office furniture.
Cost of goods sold refers to the direct costs spent on the manufacturing and production of the goods or services sold by a company (Fernando, 2021, Investopedia).
Operating expenses are the expenses that are incurred in a business during its own business op- erations. Such expenses comprise the rent, staff expenses, depreciation, marketing, research and development expenses, insurance and so on (Kenton, 2020, Investopedia). While non-operating expenses refer to those business expenses that are incurred outside of the business operations.
Such expenses include interest charges, financial expenses, loss on disposition of assets, and so on (Tuovila, 2019 Investopedia).
Profit can be described as the financial benefit after subtracting all costs, expenses, and taxes from revenue during a financial year while loss is explained as the financial deficit when the ex- penditure exceeds the total income during a financial year (Kenton, 2020, Investopedia).
2.3.2 Balance Sheet
A balance sheet, also known as a statement of financial position, is one of the financial statements that reports an organization’s assets, liabilities, and shareholder’s equity at specific points in time (Ittelson, 2009, pp 13-18). A balance sheet helps in computing rates of return and evaluating the capital structure of a business.
The balance sheet follows an accounting equation where all the assets owned by a company are equal to the sum of the liabilities and shareholder equity of the company (Fernando, 2021).
Assets = Liabilities + Shareholder’s equity
An asset can be explained as something which has value and can be converted into cash. Assets generate revenue for a company and sustain production and growth (Folger 2020, Investopedia).
There are two types of assets owned by a business, i.e., current assets and non-current assets.
Current assets refer to those specific types of assets which can be converted into cash within one fiscal year or one operating cycle. Examples of current assets are cash and cash equivalents, mar- ketable securities, accounts receivables, inventory, prepaid expenses, and so forth.
Non-current assets can be explained as the long-term investments made by a business for its pro- duction of goods and services and have a value lifetime for more than a year (Kenton, 2020, In- vestopedia). There are two sub-types of non-current assets namely, fixed assets and intangible assets.
The assets can be physically touched and seen are called fixed assets. Land, building, machinery, company vehicles, and furniture belong to this category of assets. While the assets that can not
be physically touched or seen are called intangible assets. Patents, goodwill, and intellectual prop- erty fall into the category of intangible assets.
Another key component of a balance sheet is the liability owned by a company. A liability can be explained as something of monetary value owed by a person or business. Liability may also be referred as a legal obligation of an individual or company (Hayes, 2021). There are two types of liability i.e., current liabilities and non-current liabilities.
Current liabilities are those business liabilities that are due for payment within a year or 12 months. Such liabilities include accounts payable, interest payable, wages payable payments, and earned and unearned premiums. Whereas non-current liabilities comprise those specific business liabilities that are due for payments after a year. Such liabilities include long-term debt, pension fund liability, and deferred tax liability.
The last key component of a balance sheet is the shareholder’s equity. Shareholder’s equity, also referred as stockholder’s equity or share capital, is the sum of capital invested in a business and the owner’s residual claim on assets after the debts have been paid. A positive value of share- holder’s equity shows that the business has enough assets to cover the liabilities and improves credibility (Hayes, 2021, Investopedia).
2.4 Profitability Visualization
Visualization is the technique of creating images conveying information about data and processes.
Visualization plays a supportive role, enabling the comprehension of complex data in various fields (Schroeder, 2011, pp 1-3).
Data based visualizations are presented with the help of computer-based systems such as Excel.
The visualizations assist in better understanding of the data and uncover greater insights (Munzner, 2014, pp 1). Data can be visualized in both static and dynamic manner. Static data focuses on the data collected from a certain time period. While dynamic data focuses on real- time data and is considered more interactive between users.
Profitability is determined and measured from the data extracted out of the financial statements, also known as financial data. Financial data visualization enables the conversion of big and com- plex data into a simplified and understandable manner. With the help of developing artificial and business intelligence features, it is possible to use features such as calculation, in addition with visualization in softwares such as excel, google sheet, and so on.
Profitability visualization analysis has proven to help prospective users to recognize viable oppor- tunities and concealed threats while also improving the decision-making ability in past (Gar- laschelli, 2005, pp 138-144). According to a prior research at Beijing Institute of Graphic Commu- nication, financial data analysis such as profitability analysis and visualization are explained as inseparable factors as they perform functions as providing better insights, identifying trends, rec- ognizing areas of improvement, and communicating the findings and conclusion clearly to the user.
There are many tools and techniques for financial data visualization. These tools are used to build up dashboards focused on specific themes. These dashboard present a streamlined relation be- tween data and trends (Diamond, 2014, pp 8). Graphical visualizations such as bar graphs, line graphs, area graph, and scatter plots are focused upon in the development process as it provides solutions to real-world problems with an easy-to-use approach (Lux, 1997, pp.58-61).
2.4.1 Visualization Tools and Cues
The visualization tools used in this dissertation comprises bar graphs, line graphs, scatter plot, and area graph providing an easier to understand and analyze dashboard., while producing rele- vant visuals, data is encoded with the help of visual cues, which can be alternatively called data mapping based on different variation of shape, size, colour, etc. It is crucial to choose the correct visual cues for any data visualizations. Selection of visual cues depends on the situation at hand and the user’s comprehension of the data and cues respectively (Keller, 1994). The 9 universally acceptable visual cues are position, length, angle, direction, shapes, area, volume, colour satura- tion and colour hue (Yau, 2013, n.p.).
The integration between visualization tools and cues presents highly accurate and reliable infor- mation in the dashboard. Each graph is chosen based on the respectively compatible visual cue and development.
Bar graph or chart is a method of representing a set of definite data. Data is visualized in several arranged bars, each representing a particular category. The height of every bar represents a spe- cific value showed by the vertical length of the bar chart. It is possible to show over one data bar on the axis in case of multiple variable analysis. Such a visualization is called a clustered bar chart.
Bar chart is related to the visual cue of length or height (Khan, 2011, pp 1-14).
Figure 2: Clustered Bar Graph (Chartio, 2019)
Line graph is a visualization tool where data trends are shown over a period with the help of a continuous line. It is a commonly used visualization tool in finance analysis. Line graph can com- prise over one variable Line graph relates to the visual cue of direction (Khan, 2011, 1-14).
Figure 3: Line chart (Medium, 2019)
Scatter Plot is a type of graph where a variable is plotted along two axes to show a relationship between two sets of data that share the same event. Data is graphed as several points in the graph, with each point representing a value. Scatter plot is related to the visual cue of position and is highly accurate (Khan, 2011, 1-14).
Figure 4: Scatter plot (Shmoop, 2021)
Area graph is based on a line graph with the area between the line and axis being filled with a certain color. This graph is used to represent quantitative data over a time. It is also possible to represent over one variable in the graph. Stacked area graph is a subtype of area graph where the values of each variable are displayed on top of each other. An area graph is related to the visual cues of direction and area (Khan, 2011, 1-14).
Figure 5: Stacked Area graph (Study.com, 2021)
Profitability visualization has emerged as a critical element of profitability analysis as it provides various opportunities for both internal and external stakeholders of a company. Easy to under- stand visualization tools help in highlighting and communicating insights, identify trends, fore- casting, and improve performance. The possibility of storytelling a business’s entire financial his- tory with simple and easy-to-understand visuals makes profitability visualization an indispensable element for most companies.
3 DEVELOPMENT METHODS AND IMPLEMENTATION
This chapter comprises the entire BI report development journey. Background information on the company is provided in the beginning following up with an interview with the managing director of Planray Oy on his request for the BI reports, reason behind shifting MS Power BI from Excel, and elements for each dashboard. Later, the development method is defined accompanied along with an overview of the development process.
3.1 Planray Oy
Planray Ltd started its operation in 1992. Planray is in the city of Kajaani, in central Finland. In the beginning, the core competence was trace heating, engineering, and installation. Later, they started the development of trace heating controllers. Today, they are known as the number one trace heating control systems manufacturer in Finland and deliver their products all around the world (Planray Oy, 2021).
Since 1992, Planray Oy has been constantly using Excel as their means of creating their profitabil- ity reports and conducting analysis. Each year, they dedicate a fair amount of time to create static Excel reports about the profitability measures from the historical data. This has been proven not only time-consuming but useless after first application as well.
It was noticed that financial stress was inevitable with time and growth in the small enterprise such as cash flow difficulties, excessive long-term liabilities, and redundant debts (McMahon, 1994, pp 9). Hence, a need emerged to have an analytic function that can help the management perform certain organizational functions, such as improving debt management, liability manage- ment, trend identification, progress, and compliance, and various others.
For trial, some years ago, Planray Oy converted their cash flow statement, one of the three key documents from financial statements, into a Microsoft Power BI report. The results proved to be efficient, time saving, and accurate. Following the success of visualizing the cash flow statement, Planray Oy developed another set of Microsoft Power BI report for their profitability analysis.
3.2 Qualitative Interview
An interview is defined as a structured conversation between two people where one asks the questions and the other answers them. Interview aids in gathering information related to a spe- cific topic on a primary level (Gillham, 2000, pp 1-2). In a qualitative interview, the interviewer attempts to understand the subject from the interviewee’s point of view. Follow-up questions are asked to gain a deeper understanding of the problem and expected solutions.
A person-to-person interview with the managing director of Planray Oy was completed for re- search purpose behind the development of BI reports focused on profitability analysis. There were several factors for selecting a person-to-person interview, such as in-depth data collection, accessibility, comprehensive understanding of the vision, and supplementary information.
The questionnaire covered all aspects required to answer questions related to the profitability report development. The questionnaire can be found in the appendix. The first part of the ques- tionnaire focused on identifying the reasons behind the shift from Microsoft Excel to Power BI for developing the profitability reports. The limitations of Excel and expectations from Power BI were explained in this part. The next section of the questionnaire focused on the profitability measures and variables used in the reports. The goal was to identify the key performance indicators for the profitability analysis at Planray Oy. The last part of the questionnaire was aimed at discussing the visualizations for each profitability variable and how will it be presented in the reports.
Since the interview was performed with only the managing director of Planray Oy, it is not prac- tically possible to conduct any kind of qualitative analysis, as he had the autonomy on deciding the development factors. Hence, the response from the managing director is final for this specific research.
During the interview, the managing director of Planray Oy explained the reasons behind shifting from using Excel for profitability analysis to MS Power BI were lack of real-time data, expensive maintenance, static analysis, and difficulty in retrieving the hidden data.
Profitability ratio visualizations were determined to be the key means of analysis. The primarily focused ratios were gross profit ratio, EBITDA ratio, and net profit ratio. The gross profit ratio was chosen for analysis, as it shows the company’s financial health foremost to the stakeholders.
EBITDA ratio was chosen to show the company’s ability to produce returns while keeping the costs low. Last, net profit ratio was chosen to show the overall performance of the company and the use of working capital during a specific time period.
It was also created a separate dashboard showing the visualizations for the net amount of equity and loans of Planray Oy. The reason behind this dashboard was to show the creditworthiness of Planray Oy over the years and keep real-time track of investments for the company. In addition, it was created a visualization focusing on equity ratio to show the leverage level of Planray Oy and satisfy the stakeholders by presenting the company’s ability to meet its long-term invest- ments.
At last, it was revealed in the interview that Planray Oy recently started analyzing its net working capital ratio and hence, a visualization focusing on net working capital ratio of the company was added to the reports. Planray Oy manufactures its products based on monthly customer projects and orders and thus, net working capital ratio would help to follow Planray Oy’s short-term finan- cial health to meet its orders and paying back monthly loan installments.
The above responses were the pre-requisites for the reports and were used as the foundation for designing the draft dashboards.
3.3 Development Tools
This section of the thesis describes the tools used for the development of the profitability reports.
First, the Power BI software and its operations are explained, which is then followed by the method used to develop the reports from scratch, known as the V-development method. The process implementation and follow-up of the V-development method is defined in this segment as well.
3.3.1 Microsoft Power BI
Power BI is a business analytics service developed by Microsoft. It aims to provide interactive visualizations and business intelligence capabilities with an interface simple enough for end users to create their own reports and dashboards (Ferrari, 2016, n.p.).
Power BI also enables to find and share meaningful insights with hundreds of data visualizations, built-in AI capabilities, tight Excel integration, and rebuilt and custom data connectors. This en- sures reduced added costs, complexity, and security risks with end-to-end encryption, sensitive labeling, and real-time access monitoring (Microsoft, 2021).
Power BI is also used in the development process as the development platform for the profitabil- ity reports and analysis.
3.3.2 V-development Method
The V-model started emerging around 1960s, but it was only until 1979 that Barry W. Boehm published a paper on V-model (Boehm, 1979, pp195-201). The V-Model emphasizes on a natural problem-solving approach. Starting on coarse grain level, partitioning the problem into manage- able chunks. From the fine grain level, the ultimate solution integrates up to the initial level. On each level, one can compare the solution or part of it with the problem or the related part of it.
The simplicity of this model permits various projections and results in many interpretations (Weilkiens, 2015, pp343-344).
The V-model deploys a well-structured method in which each phase can be implemented by the detailed documentation of the previous phase. The purpose of V model is to improve efficiency and effectiveness of software development and reflect the relationship between test activities and development activities (Mathur, 2010, pp29-34).
Figure 6: V-Development Process (Clarus Concept of operations, 2005)
The V-model is divided into three primary phases namely, the first phase of project definition, the second phase of time, and the third phase of project test and integration. In the first phase of project definition, a firm understanding of the concept of operations is carried out by analyzing the user’s requirements for the product. Once the requirements are completed, product design is outlined and detailed over time (Shuping, 2008, pp463-466). The qualitative interview with the managing director of Planray Oy and the study of profitability reports created via excel help iden- tify the essentials of the profitability reports. Draft dashboards are then created in an excel spreadsheet based on the analyzed information and presented to the commissioner for approval.
When the product design is approved by the user or commissioner, the second phase of time starts. In this phase, the completed and approved product design is implemented in the software or application previously determined to carry out the function. Here, a first draft of profitability report was created in Microsoft Power BI based on the pre-requisites from the interview and final product design. Once the product design is implemented into the first draft, the third phase of project test and integration starts. In this stage, the draft report or product is integrated into the main database or ERP system to test if it runs smoothly (regular, 2010, pp134-135). The draft report is published in Planray’s ERP system, called Lemonsoft, for further testing.
After the integration is successful, little independent tests are also carried to check if the product constitution is respective to the requirement analysis. Once the testing is carried out and system
integration is verified, the product can be used in operations and maintained. A regular verifica- tion test is important to carry out so that the reliability and validity of the product stays optimum.
Planray had the reports update daily and have regular meetings to ensure the proper functioning of the profitability reports.
In previously conducted studies, it is determined that V-model is easy to understand and use. It is comparatively easier to assemble a complex model with a practical orientation as the system is built upon basic building bricks. The V-model also provides a fair level of flexibility, allowing pro- ject tailoring to suit its user’s needs (Johansson, 1999, pp13). Hence, the V-model development method is most suitable for developing the Microsoft Power BI reports to analyze profit.
3.4 Development process
There are 7 steps in the V-development method and each step was performed with extreme cau- tion and concern. The first step was to analyze the concept of operations. To create profitability reports with greater efficiency, a thorough study was conducted on the previous methods used for profitability analysis in Planray Oy. Microsoft Excel has been the primary resource for carrying out financial analysis in Planray Oy. However, it was replaced with MS Power BI for the reasons mentioned in the interview with the managing director of Planray Oy, such as lack of real-time data, static analysis, and the cost of maintenance.
The next step was to identify the requirements for the development of the BI reports. The re- quirements were identified from the interview with the managing director of Planray Oy and in- cluded visualization of profitability ratios, equity ratio, net working capital ratio, and the equity and loans.
Once the requirements were defined, draft dashboards for the Power BI reports were designed.
Power BI uses DAX for operating data analysis and calculations and hence, each ratio’s formula was scripted in DAX while developing the reports. For profitability ratios, present ratio and goal ratio were scripted while only present ratio was scripted for equity ratio and net working capital ratio. Last, suitable graphs were chosen to serve as the visualization tool for the BI reports. The chosen visualization tools comprised clustered bar graph, scatter plot, line graph, and stacked area graph.
Clustered bar chart was chosen to show the profitability margin compared to the sales as it gave a clear numerical output on profitability. Line graph was chosen to visualize the profitability ra- tios, as they are best suited to show trends and direction. Direction helps to figure out the fluctu- ations and slope in the data. Stacked area graphs were chosen to show the amount of equity and liabilities are they best pre-sent the volume of data with distinction between variables. Scatter plot was chosen to represent the equity ratio and net working capital ratio as they accurately position variables over a specific period. Positioning of the variable allows better analysis and takes up less space at the same time.
Following step was to implement the drafted design to develop the reports. The implementation process was divided into three parts as a series of steps need to be followed once the design for the draft dashboard is created and development of the reports starts (Ferrari, 2016, n.p.). The first step was to collect the data from the company’s financial statements. Planray Oy maintains its financial data in its ERP system called Lemonsoft and hence, a link was created between the power BI software and the ERP system so that the required data can be imported when needed.
Next, pre-processing was performed once all the required data was imported from the ERP sys- tem so that only the relevant information remains in the data to achieve highest accuracy, in- sights, and relevance. DAX formulas were scripted in this phase as well. Once the data was mod- eled according to the pre-requisites of the report, specific visualizations were chosen as per the data and requirements. Axis, values, and legends were also defined in this step to create relevant visualizations. Once the visualizations were created, the draft report was ready to test.
The next step was to integrate the reports and start the testing. The draft report was published on the extended link of the ERP system so that the data keeps updating on the report. Such inte- gration promoted the use of real-time analysis. A session of user testing was also organized be- tween the company’s staff and stakeholders. The testing was aimed at finding the user-friendli- ness, understandability, validity, and efficiency of the reports. Prospects for further future devel- opment for profitability analysis were also discussed in the testing.
There were 7 participants in the user testing for the Power BI reports. The participants for user testing from the staff were the two product managers, the finance manager, and the managing director. A supplier and two investors of Planray Oy also participants in the Power BI report test- ing. In the beginning, an overview was provided to each participant and then they were given free
reins to examine the reports for themselves. In the end, a peer review form was given to each participant to give their views on the reports and amendments.
The results showed that all participants were content with the new reports and felt that the anal- ysis was more dynamic, fruitful, and relevant than before. However, an error was noticed during testing in the reports related to wrong formula and value script, which was corrected in the re- ports later.
The following step was to verify the system and the compatibility of the BI reports with the com- pany’s ERP system. After testing was over and the reports were amended with right formulas, variables, values, and functions; the final draft of the reports was published on the open link of company’s ERP system. The reports were kept under observation for a month to check daily up- dates and analysis. It was found in the preliminary observation that the variables derived only from the P/L statement affected a daily basis while the variables derived from balance sheet changed only once or twice the month.
Considering that, the reports were programmed to update only P/L statement variables every day and update the balance sheet variables once a month.
The last step was related to the operations and maintenance. It was had a weekly meeting on the Power BI report operations with the managing director to check the profitability analysis. A monthly maintenance on the data retrieval was also agreed to sustain the reliability and validity of the reports.
4 RESULTS
This chapter shows the final profitability reports developed with the help of Power BI for Planray Oy. The reliability and validity of the profitability reports are also discussed in this chapter.
4.1 Reliability
Reliability refers to the extent to which the same answers can be obtained using the same meth- ods and sources over one time (LoBiondo-Wood, 2014, 289-309). In this development research, there are three key attributes concerned with reliability, named: stability, homogeneity, and equivalence.
Stability refers to the ability of producing similar results with repeated testing. For the same rea- son, repeated sessions of analyzing the reports were conducted by different users to check if there was any inconsistency with the results. However, the results turned out to be the same each time.
Similarly, homogeneity means that all the ratios in the reports are measured with the same vari- able, concept, or characteristic. The BI reports were calculated based on the variables obtained from the annual financial statements. For each year, a different amount was updated in the re- ports for every variable of the financial statements.
Last, equivalency of the reports is defined as the same results produced upon using equivalent procedures or resources. Since the foundation of the reports are universal formula, the results will be similar in every case. To verify the same, the profitability ratios were calculated in Excel and Google Sheets using the formulas and the results were equal.
However, it is important to mention specific limitations for these profitability reports to work.
The calculations in the reports are carried out on a monthly basis, meaning the profitability meas- urements are calculated for each month individually. While in many larger and multinational com- panies, profitability measurement is calculated based on the total sum of variable for a particular month. For example, the gross profit ratio for March in Planray includes only the sales in March
while in a larger company, it would include the total sales from January to March. Hence, this report is reliable only when the profitability is measured on an individual monthly basis.
The reason behind calculating profitability monthly is that Planray wishes to evaluate its perfor- mance for each month separately to identify the trends between highly productive and low pro- ductive time periods.While taking the above limitation into account, it can be safely said that the profitability reports at Planray Oy are reliable over user, time, and value.
4.2 Validity
Validity can be explained as the extent to which the results really measure what they are sup- posed to measure (LoBiondo-Wood, 2014, 289-309). Validity refers to the accuracy of the result.
The validity of the BI reports is explained based on construct validity.
Construct validity defines whether the results measure the aims defined at the beginning of the dissertation or not. Accuracy is the most important factor in this measurement. After the devel- opment of reports, repeated reports, and double checking the formulas with the calculations per- formed on excel and google sheets, it was noticed that the results were highly accurate. In addi- tion, deep insights were also provided on the rise and fall of the values, trends, and future budg- eting ideas.
The same limitation for reliability applies to the validity of the profitability reports as well. Hence, to verify the validity of the reports, it was compared the profitability measurements of Planray with a similar company using the same measurements for calculating their profitability. Elektroval Oy was chosen as the comparing company in this case. Both Planray and Elektroval measures their profitability on a monthly basis and had almost equal turnover during the year 2020. The financial statements of Elektroval Oy and Planray Oy were retrieved for the same time period and the variables were identified to calculate the profitability measurements. In the first part of the validity verification, profitability was calculated for both companies using their own data and for- mulas. In the second part, the data was left the same, but profitability was calculated for El- ektroval using Planray’s formulas and vice versa. After completing the calculations, it was noticed that the result of every ratio was equal for the two companies in both cases and hence, the valid- ity check was verified.
Reports were approved to be valid after considering the results from user testing, and positive correlation between the requirements defined and results obtained.
4.3 Profitability Measurements
This segment shows the profitability ratios calculated in Power BI for the year of 2020. Since the software was programmed in Finnish, the dashboard information was retrieved in Finnish as well.
Hence, an English explanation is provided for each dashboard.
The numerical values are presented in green, showing a positive financial year. In the beginning of each year, a budgeted value of sales, profitability margins, and profitability ratios is defined by the top management of the company. If the real values obtained during the year are more than the budgeted values, then they are represented in green colour, otherwise in red as a sign of further improvement. A DAX encryption also allows the numerical increase or decrease of the real value compared to the budgeted value, providing the managers with an idea of a new budget for the next year.
Figure 7: Profitability margin and profitability ratios for the year 2020
Figure 8: Profitability ratios for the year 2020
In figure 8, the total gross profit ratio, net profit ratio, and EBITDA ratio is calculated for the year 2020.
Figure 9: Sales and profitability margin for the year 2020
In figure 9, the total gross profit margin, net profit margin, and EBITDA margin are calculated against sales for the year 2020.
4.4 Profitability Measurement Visualization
This segment shows the final visualizations from the Power BI reports developed for Planray Oy to conduct profitability analysis for the year 2020.
Figure 10: Profitability margins compared to sales for the year 2020.
This visualization shows the real-time values of sales, gross profit margin, EBITDA margin, and net profit margin. The profitability margins are represented with a bar graph and the length of the bar chart shows the amount of the variables and allows the user to easily understand which months were more profitable than others. The x-axis of the graph shows the time period while the y-axis shows the amount of revenue. For each month, fours bars are used to show the total amount of sales, gross profit margin, EBITDA margin, and net profit margin. Different colours are used for each variable for easier understanding.
Figure 11: Profitability ratios for the year 2020.
This visualization shows the real-time values of gross profit ratio, EBITDA ration, and net profit ratio.
The profitability ratios are represented with a line graph to show the trends and direction that the ratios follow. It can be seen from the visualization that June is the month with lowest ratios, meaning that the sales in June were lost. It can be associated with the fact that most clients are on summer vacation during that time and hence do not make any sales. The trends also help to recognize which months might have the highest sales or demand for stock, letting the company prepare extra stock in advance. Such actions also help in inventory management and optimiza- tion. The x-axis of the graph shows the time period while the y-axis shows the percentage value of the ratios.
The next visualization represents the equity and loans of the company.
Figure 12: Equity and loans of Planray for the year 2020.
The visualization of the equity and loans are presented with the help of a stacked area graph.
The x-axis is used to show the time period while y-axis is used to show the amount of loans and equity. In the equity visualization, it can be seen that the company capital and common investor capital are depicted with different colours to distinguish them internally.
The visualization for showing loans is like that of equity and comprises short-term loans and long- term loans. There is a slight difference between the colour of long-term loans and short-term loans for easier identification to the user. A relation can also be identified between the visualiza- tions for loan and profitability margins as they maintain an indirect proportional relationship, meaning that when the number of sales and profitability margin is higher, then more loans are paid, and vice versa. This visualization also aids in establishing the creditworthiness of Planray Oy in the investment market.
The next visualization focuses on the equity ratio of Planray Oy.
Figure 13: Equity ratio of Planray Oy for the year 2020.
Scatter plot is used to visualize the equity ratio of Planray Oy. The x-axis shows the time period while the y-axis shows the percentage value of the equity ratio. Equity ratio is one of the most important ratios to look out for the stakeholders and investors of any company. Equity ratio en- sures the operations of a company in the long run. Planray Oy has a pre-defined target equity ratio of 50% and tries to achieve it every year. As it can be seen in the visualization, Planray Oy achieved its goal by the end of the year and that indicates to the managers on the amount of assets and equity to be maintained for acquiring the targeted ratio.
The last visualization represents the net working capital of Planray Oy.
Figure 14: Net working capital ratio for the year 2020
Scatter plot is used to represent the net working capital ratio of Planray Oy as well. The x-axis shows the time period while the y-axis shows the percentage value of the net working capital ratio. The analysis of net working capital was recently introduced in Planray Oy and hence, no target ratio was defined for it yet. The reason behind checking the net working capital ratio is to keep track of company’s operations and finance for a quick run. A positive net working capital ratio also shows to what extent can an immediate project be agreed. The BI visualization will help the managers in following up this ratio and carry out short run operation planning.
All the visualizations shown above are real-time based and easily understandable. In addition, historic analysis can be performed for any time period as long as the correct data is entered into the linked software. The visualizations also proved to be highly beneficial for the managers, in- vestors, and top management of Planray Oy because of its highly accurate results. As a final product, the BI reports perform their function well and are reliable, valid, and utility.
5 CONCLUSION
The purpose of this thesis was to develop and visualize profitability reports with the help of Power BI for Planray Oy. The research expected to find suitable profitability measurements in compli- ance with Planray’s vision, and their respective visualizations based on real-time data. After properly identifying the limitations of Microsoft Excel and the expectations of the client, it was possible to develop the requisite profitability reports.
The theory comprised various measurements used worldwide to calculate profitability for differ- ent businesses. After careful consideration from both academic and client’s point of view, profit- ability ratios were chosen to be used in the reports.
Microsoft Power BI came across as a powerful tool for developing the profitability reports with its modern features comprising real-time data, dynamic visualisation, and identification of hidden data and trends.
V-development method was used to plan and follow the development of the profitability reports.
The pre-defined steps in the V-development method allowed the author to plan each phase of development with extreme accuracy and caution, resulting in both reliable and valid reports. The beginning of the development method helped to identify the drawbacks of using Microsoft Excel for profitability measurement and analysis and the interview with the managing director of Plan- ray helped in defining the expectations from the new profitability reports. This allowed in design- ing the draft dashboards complying with the pre-requisites of the profitability reports. After the draft dashboards were approved, they were designed in the Power BI system and linked to the respective financial data from the company’s ERP system. Once the design was completed, the draft was published on the ERP system and then tested there for further improvements. A relia- bility and validity check were also carried out to verify the worthiness of the new profitability reports. When everything was checked out as success, the profitability reports were officially re- leased in the ERP system for all stakeholders to access and analyse. Regular updates and mainte- nance were agreed upon to keep up the reliability of the profitability reports.
It has been three months since the profitability reports were officially released on Planray Oy’s ERP system extension and the profitability analysis have a taken a significant spurt in term of
efficiency and time management. According to the managing director of Planray Oy, Power BI has turned out to be a great tool for monitoring finances and profitability. Quick accessibility and easy understandability of Power BI reports has promoted further use of business intelligence in the company to analyze product development and distribution.
According to the finance manager, current monthly financial reviews include more meaningful data and better insights compared to excel. The stakeholders have appeared to be more inter- ested in the investment flow with the help of profitability reports. Creditworthiness is also con- venient to represent to financial institutions.
Hence, it can be presumed that the profitability reports met its expectations and performed the functions required. In addition, V-model development proved to be a considerable development method as the thesis goals were achieved and an exceptional service was introduced in Planray Oy after 25 years of using time consuming, static, historic, and complicated excel profitability reports.
The author could expand her knowledge on profitability and Power BI in-depth while working on this thesis. Being interested in finance and operations of the company, the author could navigate through various aspects to represent profitability in different ways and finally chose the one which was most suitable for the context. However, it is important to highlight that there is still room for future development in the profitability reports by introducing ratios and shares, such as liquidity ratios, solvency ratios, equity shares, and so on. Such additions can improve the overall value of the reports and increase the value proposition of Planray Oy in front of its stakeholders and potential investors.
In conclusion, it can be said that the decision to develop profitability reports with the help of Microsoft Power BI instead of Excel turned in favour of the administration and increased the productivity in the finance department. While there is always room for improvement, the current development is a noteworthy step for Planray towards using business intelligence in its daily op- erations.
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