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Tag: profitability

Critical Factors for Improving Profitability

by lauramills
Critical Factors for Improving Profitability

In a recent survey of our clients, improving profitability emerged as one of the top three priorities on their business agenda. Profitability is the lifeblood of any successful enterprise, and understanding its intricacies is crucial for business owners and managers alike. In this blog, we’ll dive into the two primary drivers of profit and explore the indispensable link between profitability and cash flow.

Profitability is affected by sales and reducing costs. Within the realms of sales there are 3 critical areas: price, volume and customers. These elements are not isolated but intricately interconnected, each influencing sales in unique ways.

  1. Price

To improve profitability and performance, price sets the scene. It will determine the volume of sales and ultimately attract different types of customers.

The most obvious part of profitability is the selling price. It is essential when determining the price to ensure that the price and sales volume allow the business to be profitable. It is therefore, good practice to also review these prices regularly.

Setting prices involves a careful balance across your product range. It’s common to have “loss-leader” products, which may not yield substantial profits but can be offset by other lucrative offerings. Competitive pricing and your desired market positioning should also guide your pricing strategy. Discounts can boost sales volume but may impact profitability, so diligent record-keeping and regular review are key.

When offering a discount to a customer, always remember that the discount will increase sales volume, but it will also eat into the profitability of the products. You should record all discounts and review them regularly.

Two valuable metrics for monitoring pricing effectiveness are profit margin and mark-up. Both metrics should be in sync with your pricing strategy, allowing you to make necessary adjustments.

  • Always review your gross and net margins against previous periods
  • Understand customer profitability and their behaviours
  • Minimise discounting if possible
  • Implement and review a mark-up policy
  • Analyse sales on a regular basis.
  • Use key financial indicators to identify any anomalies that may impact the sales price:
    • Cost of goods sold margin
    • Gross margin
    • Average stock turnover
    • Mark-up

  1. Volume

There are two ways in which volume can be increase. The first is through increasing your current level of sales with your existing customers, and the other is sourcing new clients.

To boost sales with existing customers, implement a comprehensive marketing strategy and capitalise on the often-overlooked opportunity of up-selling. Effective sales targets and an understanding of your break-even point are essential to drive performance.

Selling targets are a way to monitor overall performance and enhance profitability. Therefore, I advise you to look at this carefully as it can have an impact on other areas of the business. Understanding your break-even point will allow for realistic targets to be set and ensure profit is maximised.

To help increase the volume:

  • Understand your customers’ buying patterns
  • Implement a marketing strategy to increase sales volumes
  • Introduce loyalty programs that encourage referrals
  • Train staff to excel in upselling high-profit products.
  • Use break-even calculations to set achievable sales targets
  • Explore opportunities to expand into new markets

  1. Customers

Exceptional customer service is the cornerstone of customer retention and acquisition. Understanding your customers’ needs and preferences is a simple yet powerful step towards business improvement. Utilising a Customer Relationship Management (CRM) system can provide invaluable insights into customer behaviour.

  • Understand the needs of the business customer and use this information to improve the customer service experience.
  • Utilise tools like Survey Monkey to measure customer service levels.
  • Reward current customer for their loyal support
  • Consider using mystery shoppers to monitor customer service
  • Maintain regular contact with customers to stay top of mind

In conclusion, the pursuit of profitability is a nuanced journey, and this blog only scratches the surface of what’s achievable.

At The CFO Centre, we boast a team of over 45 experienced CFOs across Australia and New Zealand, and over 1000 globally. Our track record speaks volumes about our ability to help clients boost their profits. If you’re interested in learning more, feel free to contacting us at 1300 447 740. Your success is our priority, and we’re here to help you on your journey to greater profitability.

You can also get in contact with us here.

First published on 22nd Feb ’22
Updated on 15th Jan ’24

Harness Your Profits With 7 Business Levers

by lauramills
Harness Your Profits With 7 Business Levers

Have you ever wondered why your cash-flow fluctuates even when sales are strong? Or how your business is valued in the eyes of an external party? Then you need to know the seven (7) levers in your business to increase profits.

With just a little additional focus on one or more of these 7 levers, you can directly improve the cash-flow, profitability and/or value of your business. There’s no smoke and mirrors, nor anything particularly difficult to undertake. However, many business owners do not take the time to appreciate how the financial performance of their business really works.  So, let’s break it down.

Often business owners will primarily focus on sales volume, in other words trying to sell more. However, whilst sales volume is important, it’s only one of the 7 levers available to you.

What are the 7 levers in a business that control your cash, profit and business valuation?

The first four levers are focused on your Profit and Loss and therefore directly impact the profitability (and cash-flow) of your business. As most, businesses are valued at a multiple of cash earnings. These levers also have a huge impact on the value of your business (along with other aspects such as Brand, customer base / income streams, and internal expertise / “keyman” dependence).

     1.Volume

Selling more – although increasing sales can grow your business, don’t forget to focus on the other levers below! How much of every extra $1 in revenue turns into profit and into cash in your bank account, and when?

Tip – formulate a sales & marketing plan, with a budget, which is aligned back to your  overall Strategy. Review and tweak the plan regularly.  This will help keep you focused on the right way to grow your top line.  Any growth needs to be sustainable!

      2. Pricing

Can you increase your prices? Even a 1% increase can have a big impact. There can be a fear of losing customers by putting up your prices, which can often be unfounded.

Tip – review your margins by product / service stream / customer to ascertain which sales are making you money and which are not.  You need to know your break-even points!  Your part- time CFO can help – they love this stuff!

Tip – the results of your pricing analysis need to dovetail into the sales & marketing plan. It’s possible to make more profit from less turn-over!

      3. Cost of Goods Sold – reduction in % terms

This lever is most relevant to those businesses with direct costs such as manufacturers, construction, etc and places the focus on your gross margin.

Tip – revisit your direct purchasing arrangements and negotiate better terms and pricing. For example, bulk purchase discounts, early payment discounts, reduced freight.  Maintaining strong supply chain relationships is important but that doesn’t mean you can’t ask the question (or find potential alternatives).

Tip – review your direct labour-force using metrics such as labour utilisation, overtime levels, re-work, customer complaints, and down-time.  You may be able to re-deploy staff or reduce casual labour / overtime once you have this data.  Again, your part-time CFO can make this happen for you.

     4. Reducing Overheads

This may sound like an obvious one, but we always find at least some unnecessary “fat” in our client’s overhead expenditure.

Tip – someone needs to review the overheads line by line. Indirect / office wages, communications, insurance, utilities, freight, and advertising are the common ones where savings can be achieved. Even small reductions in certain areas can all add up over time!

These last three levers are focused on your Balance Sheet and are collectively called Working Capital. They have a significant impact on your cash-flow and therefore also on your funding requirements. Many businesses can avoid additional debt borrowings, or pay their existing debt faster by shortening their cash-conversion cycle.

     5. Reducing debtor days

This means improving the ageing profile of your Accounts Receivable function (i.e. getting your customers to pay you faster).

Tip – review your credit control policy and your payment terms as customers with poor payment histories should be carefully managed.  Review your collections process in terms of who chases the debt and when.  The introduction of direct debit may be an excellent solution for some businesses.

     6. Reducing stock days

This means a faster conversion of your inventory (if you carry it) into sold product, thereby reducing the amount of stock you hold.

Tip – introduce a stock-take process if you don’t have one. This can ensure that your financial records mirror what you actually have on the shop-floor. Then review the results of the stock-take for slow-moving or obsolete stock items which may need to be discounted in order to convert them into cash.  Your purchasing policies may also need review if you are over-stocked with certain inventory lines.

     7. Increasing creditor days

This means taking longer to pay suppliers (without hurting the relationship or cutting off supply).

Tip – contact your suppliers to re-negotiate your settlement terms. It’s just a matter of asking the question – they may say “no” but then again, they may really value your business.

Now you know the what the 7 levers are, it’s time to do something tangible with them in order to make a real impact on your business. If you don’t have the internal expertise or time to make it happen, we would be happy to talk to you about how a part-time CFO can bring this to life. After all, as CFOs it’s what we do!

Call us on 1300 447 740 to find out more, or you can contact us here.

Photo by Artem Podrez from Pexels

The CFO Operator – Increasing your Profits

by lauramills
The CFO Operator – Increasing your Profits

Cash vs Profit

If cash used to be King, in today’s new landscape it’s now Emperor. The Operator frees up the Business Owner from having to worry about the day to day financial operations. Cash has always been critical to every business, however, now more so than ever. Your CFO will help (re)structure your business to maximise your cash position. This involves balancing supply and demand while cutting back unnecessary costs and improving productivity, efficiencies and ultimately profit.

4 areas of focus are:

  • Maximisation of Profits and Profitability
  • Ownership of Cash flow
  • Reduce Costs
  • Increase Productivity & Efficiency

The CFO as an Operator

Being thought of as the Operator may not be the first role that a small business owner would think of for their CFO. In his blog, my colleague from The CFO Centre – Dr. Andre Van Zyl set out The Strategist role that a CFO often fills Under The Spotlight – The Strategist. While that role is critical for any organisation’s long-term existence, CFOs also have vast tactical experience in an Operator role. We are obviously not referring to operating a factory floor machine. We mean that the CFO has the ability and experience to oversee and operate a number of critical functions. A calm and reassuring Operator may be key to a company’s future.

In a more benign operating environment, the maximisation of profit may be central to a company’s strategy. In the current environment keeping a tight control of cash and costs will increase organisational efficiency.

Time

Time, or the lack of it, is so often cited by small business owners as one of their biggest frustrations. Our clients often comment that they are spending so much time working IN-the-business that they can’t spend enough time ON-the-business. A Part-time CFO who works closely with a small business owner can free up time for the owner by sharing the load. As a result, this ensures the owner is fully focused on those very roles that were the initial catalyst for creating the business. This can be a significant ‘value add’ aspect of the Operator role of a CFO.

Our CFOs have either worked their way up through, or had executive responsibility for, the Finance functions in various organisations. They deeply understand the importance of running a tightly controlled organisation. This includes specific focus on cash flow management, profitability, and productivity.  Andre wrote about developing three-way financial forecasting models which are critical for banks and financiers. It is just as important to deliver against those models.

Making Critical Decisions

Many businesses need to consider whether current business models can survive in the longer term. Critical decisions may need to be made on products or business lines to either scale-up, maintain status quo, scale-down or even shut-down completely. A part-time CFO can help small business owners as they work through that exercise.

A new or refined operating rhythm may therefore need to be designed. This could mean minor tweaking or more major restructuring. Consideration of this may be critical for survival. The Operator who has extensive business experience will greatly assist with a rapid transition to a new business model. Central to this will be the robust and disciplined forecasting exercise.

At The CFO Centre we have the relevant experience required to assist business owners in navigating and operating during the current and future challenges. The objective must be to future proof your business, and The CFO Centre is here to support you.

 

Written by John Paterson, Principal (NSW) – The CFO Centre.