Price-Volume-Mix Analysis: a Worked Example

A credit paper that reports revenue up 7% has said almost nothing about the business. The same figure can come from winning customers at steady prices, from raising prices to customers who are quietly leaving, or from one large new account for a premium range while the core trade shrinks. These are three different credits. The first is a business growing; the second may be one running down its franchise; the third depends on a single relationship.

Neither IFRS nor FRS 102 asks a borrower to analyse its revenue this way, though listed companies often discuss price and volume in their results. A mid-market lender asks for the split from sales data by product, customer or channel, for the past year and for the forecast it is being asked to lend against.

This is one common method, not the only one, and the choices inside it change the answer. Measuring price on this year's units, as here, puts the overlap between price and volume into the price effect; measuring it on last year's units leaves the overlap to be shown separately or placed elsewhere. Mix depends on the level at which products are grouped: two groups show a shift between them and hide every shift inside them. And the same split can be run on gross profit or contribution, using margins per unit instead of prices, which tells a lender whether the mix shift made money as well as revenue. A borrower's analysis is read with its method stated.

A paint manufacturer, constructed for this page like every figure in it, sells a trade range to decorators and a premium range through retailers. Last year it sold 400,000 litres of trade paint at US$12 and 200,000 litres of premium at US$30. This year it sold 290,000 litres of trade at US$13 and 250,000 of premium at US$31. Most of the premium growth came from one new retail customer.

The headline is growth of 6.7%. Underneath, the business sold 10% fewer litres, and its trade volume fell by 110,000 litres, more than a quarter, in the year it raised trade prices. All of the growth, and more, came from selling a higher share of premium paint, most of it to one retailer. A lender now has three questions instead of one: did the trade price rise cost the trade customers, will the retailer reorder, and what happens to revenue if it does not. The figures are the example's, not a market norm.

Two further effects are often split out before price, volume and mix are read. Revenue from a business acquired during the year is removed, so the analysis covers the same business in both years, and the borrower's pro forma figures handle it separately. For an exporter, the effect of exchange rates is removed, so a weaker home currency is not mistaken for a price rise. Then the mix result is read against customer concentration: a favourable mix built on one account carries that account's risk.

The other reading is margin. A price rise that only passes on dearer raw materials adds revenue and no profit, so a lender runs the split on contribution as well, and sets the price effect against the change in input costs.

DEFINED IN ONE PARAGRAPH → · CONTRIBUTION MARGIN → · CUSTOMER CONCENTRATION →

It decides how much of a forecast a lender believes. A borrower that plans revenue up 8% is asked for the same split of its plan. If most of the growth is price, the lender asks whether customers have accepted rises like that before, and what happened to volume when they did; the paint maker's history suggests an answer. If it is volume, the lender asks where the new units come from. If it is mix, it asks which customers make it. The lender's own case then keeps the parts it can support and tests the business on the rest falling away.

HOW BANKS TEST BORROWER FORECASTS → · HOW BANKS READ MANUFACTURING →