6 Tactics to Improve Unit Margins

In essence:

The unfavourable position of “the profit police” may fall to CFOs. Although difficult, it must be done by someone. Runways are determined, and recovery options are ranked according to likelihood. Finance teams can assess if an investment that was profitable before the pandemic is still profitable.

Your business receives the gift of breathing room by carefully managing cash while maximising adjusted unit profitability.

To adapt to a new business environment, companies are utilising a wide range of pricing strategies. Monitoring profitability ratios, however, is one recommended practise that might have been abandoned (opens in new tab).

CFOs should consider whether recent adjustments to staffing, raw material costs, supply chains, our core business model, or other factors have had an impact on margins that will be felt in the coming year and beyond.

It’s a pertinent query. The U.S. Bureau of Labor Statistics reports that April saw the largest increase in food costs in over 50 years, which has a negative effect on restaurants and grocery stores as well as consumer disposable income. The price of oil has increased dramatically as well. Prices for nonresidential construction materials increased on average by 2.3%, according to the agency’s June report.

Sales teams may face pressed to close deals in the meantime as they struggle to meet their quarterly goals.

Joanne Griffin, founder and CEO of AdaptIQ(opens in new tab), a consulting company that offers clients advice on adaptability strategies, said, “Spend some time considering how these decisions might impact your business in the longer term, whether you’re considering price reductions, providing added-value services to existing customers at no cost, or simply extending credit terms as an olive branch of solidarity.”

Avoiding managing for cash flow at the price of profitability and allowing sales teams provide substantial discounts in the hopes that you may reverse course when conditions improve are two adjustments.

Over-discounting is extremely tough to recover from, so instead of immediately turning to price reductions, think about improvements, value-added services, or flexible payment options. If not, you run the danger of losing clients when you finally need to raise rates to levels that are profitable. And that’s pricey; it’s typically estimated that getting a new customer costs five to twenty-five times as much as keeping an existing one.

Even while it’s difficult to predict when the economy will rebound, one thing is certain: cutting your profit margins will reduce your runway. CFOs should collaborate with sales leaders to determine how to strike a balance between the demands of the company and keeping current clients, who, if treated well through trying times, generate excellent references and are more likely to accept new goods.

Run updated profitability ratio(opens in new tab) and lifetime value/customer acquisition cost (LTV:CAC) calculations to see if price reductions or extended payment periods are affordable. Put in writing how long any price breaks will be in effect.

Look forward

Economic disruptions give financially responsible businesses the chance to outperform rivals. Financial restraint entails keeping an eye on unit economics and balancing earnings where there is demand. The third component of that equation is expanding new revenue sources when demand appears to be imminent.

That calls for two things: Accelerate your visioning and strategic planning processes while conducting a thorough profitability study of your primary products and services to determine where to spend.

When consumer demand is erratic, raw material costs are growing, and you’re struck with unforeseen charges like renovating premises for safety, pricing to retain margin can be challenging. Your company’s overall gross profit margin can be kept on track by maintaining a proper utilisation across the organisation and monitoring project-by-project profitability.

How does “on track” appear? Several benchmarks are provided by our own analysis: 32% for a marketing firm. Whereas wholesale wholesalers are closer to 10%, retailers should aim for 28%. These figures are based on Brainyard’s sector-specific KPIs, which are derived from usage data that has been anonymized and aggregated from about 21,000 EOXS ERP users.

Refocus on operations and DSO in addition to adjusting gross profit margin in light of the probable increase in cost of goods sold; decreased sales volume or price pressure; and some whole new KPIs CFOs are examining, like PPP loans received and if they can be converted to grants:

Profitability is defined by operating margin, often known as return on sales. OM accounts for overhead, or indirect company costs, which may have altered in the most recent quarter. You might be saving on energy if you’ve allowed staff to work from home, but you might be spending more on IT support. We advise keeping track of the costs per employee related to various job circumstances.

ROS tracks both productivity and revenue. Retailers and distributors need to improve their reverse-logistics procedures as they deal with a flood of returns.

Days with extraordinary sales: How long does it typically take your clients to pay invoices now compared to six months ago? DSO provides an overview of how your receivables are handled. High DSO equates to low cash flow and shows that liquidity management needs to be improved.

DSO also draws attention to underperforming clients.

According to Mark Faust, a growth adviser at Echelon Management International, “This opportunity has enabled savvier organisations to stand back, reassess, and intensify focus on the more profitable areas and offers” (opens in new tab). Prioritize your clients and products according to their profitability. Set a new boundary for what you won’t sell, and increase your efforts in the most lucrative sectors.

Maintain strict control over cash management in addition to prioritising product emphasis by margin so that your company can take advantage of new chances. Although that may be easier said than done, there are excellent practises for maximising liquidity.

According to Griffin of AdaptIQ, “I see a lot of brilliant finance executives in ‘paralysis’ mode just when you need to activate your brain’s fullest potential for rational decision-making.”

It’s crucial to overcome analysis paralysis in order to expand new revenue streams when you identify demand.

According to Griffin, “CFOs must devote time and resources to developing robust, adaptable, and responsive financial models to provide quick forecasting of alternative outcomes.”

The business will stay focused on quickly adjusting to emerging trends as they occur by increasing the frequency of financial modelling and expanding that model to incorporate a wide range of potential outcomes.

The businesses who maintained expenditure restraint and margins will be the ones that come out of the pandemic stronger. Cash equates to quickness.

According to Edward Hatfield, CFO of Boost&Co(opens in new tab), a UK-based independent asset manager specialising in growth-lending services and venture funding, “Being in a strong cash position not only smooths out the inevitable economic bumps in the road, but also allows for companies to seize opportunities.”

Six steps to guarantee profitability

There are some basic stages that CFOs may take to create their profitability strategies, even if every organisation has different financial conditions, resilience levels, risk tolerances, and goals. Among the most important factors are listed below:

Start at the top line at all times. To calculate the overall dollar amount of income that is potentially at danger, carefully investigate your customer base and honestly assess your vertical and specific-client risks. Use your data to spot and respond to changes in consumer demand, customer behaviour, and market trends that have a direct influence on your bottom line. About the state of your customer base, be honest. Don’t waste time going after new clients who have the odds stacked against them.

Costs should be reviewed line by line. The cost of travel is a good illustration because employees either don’t travel for work anymore or do it very infrequently. What can you take away from this experience in terms of the types of travel that are necessary for the company? Next comes real estate. Many small to medium businesses are rethinking their demands for commercial real estate for the foreseeable future, like Morgan Stanley and Barclays(opens in new tab), who have announced that they will significantly reduce their office footprints. We have suggestions for haggling with landlords.

Reduce the timeframes for capital-in-progress. Capital-in-progress, also known as capital work in progress(opens in new tab), is something that every CFO monitors since it shows where the company’s cash is being used up. It is used to reflect current costs associated with long-term initiatives and is represented as an asset account on the balance sheet.

According to Mahesh Veerina, CEO of Cloudleaf, a company that works to improve logistics and increase supply chain visibility, “companies with deep visibility into their supply chains see where delays or shortages are and shorten that capital in progress timeline by redistributing resources from locations with extra on hand or where it’s not yet needed to locations that are experiencing delays in receiving materials and equipment.” This results in quicker capital release and returns that revenue to the company’s earnings.

Make working capital work harder in related fashion. You may free up more cash from your working capital by comprehending variations in cash flow patterns and what they signify for your company, according to Griffin. A reliable cash-flow forecasting model helps reduce supply chain risk by releasing extra cash that is locked up in receivables or stock.

Renegotiate agreements. It’s likely that your business has already taken some of these steps to delay or reduce some short-term expense obligations. It’s time to review every contract again in order to realise longer-term savings. Among them: If you intend to continue having some or all of your staff work remotely for the foreseeable future, think twice before signing office equipment leases and managed services contracts. Examine contracts carefully in an effort to lower COGS. Exist any vendors who will lower their prices in exchange for a longer-term contract? Reach out; given that organisations’ relative interests vary, there might be areas to negotiate a tradeoff.

Balance revenue with consumer expectations. Companies have been concentrating on enhancing the client experience for years, and they must maintain this mindset to be competitive. Nonetheless, it might be more important than ever to decline requests from clients or consumers.

Create discounting guidelines based on profitability, and ensure that all salespeople are aware of them. That will stop money leaks and lessen opposition when it comes time to raise costs in the future. CFOs need to know when to demand department heads provide statistics to back up assertions about sales, output, or anything else, as Brainyard editor Art Wittmann recently noted.

Challenge the current situation. Griffin advised people to “accept the anxiety connected with the uncertainty about the future.” “Use your fear of dying to motivate your unlearning. To deal with this moment of unparalleled ambiguity, you should question the assumptions in your business model, create multiple scenarios, and have a Plan B, C, and D ready.

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