If there’s one strategic shift in thinking that can transform the value creation in any business it’s this: instead of focusing on growing turnover, focus on growing profitability.
Not all business growth is healthy growth. We’d like to think it’s the healthy, more profitable growth you’re after. But do you know how to find it?
Different customers and different products or services can be categorised as follows:
- High sales/high margins
- High sales/low margins
- Low sales/high margins
- Low sales/low margins
Profitability Opportunities aren’t Always Obvious
Strategic planning for growing profitability is more sophisticated than simply saying we want to focus on the high sales/high margin parts of the business. For one thing, that market may already be saturated. There could be competitors or innovations emerging that will progressively drive down margins.
It could be that areas with low sales and high margins are your best opportunity for growing profitability. Perhaps where you have high sales and low margins, you could experiment with putting up your prices.
But before you discard the low sales and low margins category, we’d suggest looking at the growth potential. Ask yourself what you would need to do to grow the margins, such as improving productivity or changing your supply chain. Would economies of scale kick in at higher volumes?
Without Data You’re Guessing
To make the right strategic calls about where to target promotional and sales activity, how to adjust prices, where to cut costs and what things you should simply stop doing, you need detailed management accounting reports.
You also need to be feeding your accounting system with accurate information, structured in the right way to deliver the detailed insights you need. Revenue attribution is generally easy. What needs more careful analysis is exactly how much it costs you to do certain things and support different customers.
The default settings in your accounting package won’t give you the detail you need to identify the most profitable parts of your business. If you want to know more about the metrics you should monitor in your business, we have more details on our resource centre.
The Rosy Jeffery team will work with you to establish the level of data collection and reporting you need. Then, we’ll help you interpret the data accurately to make better decisions about the future so that profitability isn’t an afterthought – it’s what drives the process.
If you want to discuss how to ensure your business finances are set up to help plan a more profitable future, contact us here or call us on 01297 639457.
