Profitability

Profitability

Johannes Hoech provides a path to faster revenue growth.

If you want to know how your marketing and demand gen teams performed last quarter, you’re in luck. There’s a slew of marketing and revenue analytics tools geared at measuring historical lead generation and conversion rates and attributing past revenue to lead sources.

But if you’re the CEO of a small to medium-sized tech startup, your true objective is to minimize your time to future revenue – and last quarter’s metrics alone aren’t going to get you there. Sure, historical performance can offer lessons in how to optimize going forward – but, for the most part, the past is the past, especially if the underlying data is insufficient or of low quality. The key to faster and greater revenue lies not in recapping last quarter but in accurately forecasting achievable performance for the rest of the year. That’s what the Board wants. That’s how you identify the resources necessary to hit your number. That’s how you win.

And what tools do today’s CEOs use for their forward-looking objectives? Little more than homegrown spreadsheets full of numbers, distributed across various computers in their companies. Between the CFO’s company model, the CRO’s bottom-up forecast or quota capacity model, the CMO’s marketing metrics, Revenue Operations’ pipeline calculations, and the CEO’s own model, there often are five or more spreadsheets … that don’t talk to each other and that often are based on different assumptions that can’t model the complexities of a company’s growth. And trying to cascade a coordinated set of changes through these disconnected spreadsheets takes days or weeks to ensure everyone is in sync – if ever.

It’s long past time to shift from backward-facing marketing analytics tools or simple, disconnected spreadsheets to forward-looking “Growth ArchitectingTM”. This means investing in planning tools and approaches built to produce reliable company growth plans, enabling CEOs and CROs to actually succeed in their jobs without having to report to the board at the end of the quarter being on the defensive (for a deeper analysis of these risks, see our recent blog, “Are you missing your number or is someone over-forecasting?”). By making these shifts, C-level leaders can accomplish two things:

Faster time to revenue – They’ll have the data-driven plan they need to start producing revenue sooner.

A steeper ramp – Not only will the money come in faster, there will be more and more of it as time goes on.

Key points include:

  • Legacy tools
  • Growth architecting

 

Read the full article, Path to Faster Revenue Attainment – And Steeper Revenue Ramps, on Premonio.com. 

 

Mark Hess shares a valuable article that explains how to increase profitability.

With the economy slowing, many companies will shift their focus to improving their profitability. Is your management team prepared to take a fresh look at how to grow profit margins? In our work with mid-market companies over the last decade, we have helped uncover many different ways to improve profits. Here are our Top 5 approaches to improving your profitability, with two bonus tips for good measure.

1) Do you really understand the economics of your business?

It’s vital that the right metrics are used to measure profitability. An example: when working with one client that sold direct to customers and also sold through distributors, we realized the way our client defined their profit margin led to an incorrect view of the economics of direct vs distributor customers. Because this client defined profit margin from net revenue (after large customer discounts) instead of gross revenue, the discounts didn’t factor into the calculation—so this client fooled themselves into believing that the customers who purchased through the distributor were more profitable than they really were. Defining financial metrics so that they are meaningful and lead to good business decisions is critical for making decisions that can improve the bottom line.

Realizing the true economics of a business—by using the correct, properly defined metrics—thoroughly changed this client’s understanding of what a “good customer” looks like and, in turn, helped maximize profits going forward. In effect, this client doubled sales when they shifted their focus to selling direct when possible.

This particular client’s experience shows how vital it is to have a clear understanding of each individual component of the bottom line. Without a clear view of each component, it’s difficult to make decisions on how to move forward.

2) When was the last time you reviewed the structure of your pricing?

Be sure to review and refine your pricing strategies every couple of years. Not regularly refreshing your view of pricing leads to not charging appropriately. What happens all too often is that a particular situation leads to offering a price adjustment, then that adjustment becomes the norm. This results in a pattern of not looking at all customers in the same way and then offering customers discounts that are not warranted.

 

Key points include:

  • Legacy IT systems
  • Internal benchmarking
  • Procurement processes review

 

Read the full article, 5 Approaches to Profitability, on Maven-Associates.com.

 

Andrew Seay provides an article that identifies five ways your inventory costs are hurting your bottom line. 

For its status as the arch-enemy of “lean manufacturing,” excess inventory can actually feel pretty good in a company:  It prevents lost sales due to stock-outs.  It provides peace of mind when a critical piece of equipment breaks.  Ordering in bulk often reduces piece price, providing a benefit to cost-of-goods-sold (COGS).  If anything, inventory can often feel like it’s saving a company money.

So, why not go ahead and make the big order with that supplier to get a break on material cost?  Or do a large production run to amortize “make ready” expenses?  Or build up a big queue on the production floor to bump up OEE of your equipment?

The problem with inventory is that benefits are often easier to observe than the costs.  When the costs are added up, inventory can be surprisingly expensive:  Our clients typically calculate a cost of inventory in the 14-20% range over the course of a year.  This can add up to big dollars that ultimately cost your company money.

This article will detail 5 ways that inventory is costing your company money, potentially without your knowledge.  It will review the approach to calculating the annual cost of inventory and provide some tools that may be helpful in sizing annual impact.

  1. It’s tying up cash that could be used to fund growth

The opportunity cost of using cash to fund inventory is often a significant expense.  We often hear clients reference the cost of their warehouse credit facility to estimate the opportunity cost of tying up cash in inventory.  While this is a great, start, it really doesn’t tell the full story for two reasons:

  1. The true cost of capital should be measured based on the weighted average cost of capital, which includes the cost of equity, which is generally higher than the cost of debt.  This can lead to underestimation of the true cost of holding inventory, resulting in increased willingness to hold excess inventory on the balance sheet.

  2. Short falls in cash can limit the business’s ability to invest in high-return projects.  This is a value much more difficult to measure until an opportunity is presented.  A “slam-dunk” project may present an opportunity to produce high returns, but may not be accessible due to a shortfall of cash.  As a result, we often see management teams become distracted with closing new credit facilities or, worse, dreaded and energy-draining equity raises.

 

Key points include:

  • Damaged, lost, aged and obsolete, inventory directly impact earnings
  • Your inventory doesn’t pay rent (but someone else’s might)
  • It obscures operational issues that should grab your attention

 

Read the full article, 5 Ways Your Inventory Costs are Hurting your Bottom line, on SeayAssociates.com. 

 

Marcin Mazurek shares interesting financial insights on the major bank challengers in Europe.

A review of operations of major bank challengers after a year of significant challenges offers some interesting insights.

  1.   Slower customer growth

The group of major* players representing top bank challengers in Europe (Revolut, N26, Monzo, Monese, Starling, TransferWise, Curve, and Tandem) served nearly 39 million customers as of Q4 2020 as compared to nearly 27 million as of Q4 2019. What is striking here is a fast decelerating customer growth. While the acquisition rate remained stable at above 100% p.a. on average between 2016 and 2019, the growth decelerated to “only” 46% in 2020.

What happened that the customer growth rate halved in just one year?

Incumbent banks catching up. Large financial institutions might be slow, but they keep improving their value proposition and gradually reduce the service/offer gap to challengers. This includes leveraging PSD2/open banking opportunities as well as various product fixes and eliminating key pain points which helps to prevent further loss of customers;

 

Key points include:

  • Competition from incumbent financial institutions
  • Changing needs of customers
  • Falling valuation multiples

 

Read the full article, Back to Reality – Major bank challengers in Europe switch gears and focus on profitability, on LinkedIn.