Profitability Cases
Why exactly do you have to look at gross profit (instead of net profit)? Also, are there cases when this is not the case?
Aug 19, 2015
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Generally speaking, because gross profit is fairly representative of what net income would be. All businesses that sell goods have revenue & COGS. This keeps the case at a business level without worrying about minute/non operational expenses like interest, depreciation, legal, etc.
Well, I get your answer and I am very thankful that you responded, but I'm not too sure about it.
First, saying that gross profit is representative of net profit (which is same as saying vice-versa, i.e. net profit is representative of gross profit) is not an argument to use one over another.
Second, saying that interest, depreciation, legal, etc. are irrelevant means that you are doing a couple of things that every case interview guide tells you not do: making lazy implicit assumptions, not being collectively exhaustive, etc.
I get what you mean by "keeping case at a business level" but I think that this is exactly the kind of wishfully arrogant image that some wannabe consultants have about consulting, i.e. making strategy recommendations to CEOs while in fact more often than not profitability really increases once you start tackling lots of small and boring obstacles. (Or, who knows, perhaps not.)
I think you may be just thinking too much into it. The job of a strategy/operational consultant in this scenario is to improve the operations of the business. Most of the cost items that fall below SG&A are non-operational. Sure, you can find a way to change Depreciation, but that can really only be done by changing accounting methods, not by changing the way a company does business.
Additionally, cases aren't meant to explore every feasible option of improving profitability, they are gauging your ability to find the most actionable and effective option (the 80/20 thought process). Not only is this most representative of what the actual work would look like, but it also keeps non business majors getting stuck on business concepts that can be easily learned (D&A, foreign exchange, etc.)
Lastly, in certain scenarios (Private Equity), no one cares about net profit. It revolves solely around EBITDA (yes, I know, not exactly gross profit, but you get the idea). So, sometimes, it's just the best practice of the industry.
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