Is “Sell More, Earn More” a false economy?
When you interact with SME business owners on a regular basis it’s inevitable that many of your conversations will focus on the performance of the business; and if you are engaging with ambitious business owners, you are likely to have heard the following assertion…
…“If only we could sell more.”
Few would argue that incremental sales are not critical to the success of a business, but is simply selling more the best way to generate more cash and a healthier bottom line?
The ability of a business owner to price products or services effectively, whilst maintaining a tight control over costs, is critical to delivering profitability, and indeed cash, and in the current climate where businesses are experiencing a seemingly never ending increase in costs, pro-actively exploring the key financial drivers within the business should be a priority topic of conversation.
Consider for a moment a business which currently achieves a margin of 30%. If prices could be increased by 10%, the business could suffer a 25% decline in sales volume before gross profit was negatively impacted. This same business, if it were to reduce prices by 10% in a bid to increase sales volume, would need to achieve a massive 50% increase in sales to maintain the same gross profit.
For many, the figures above will come as a surprise, and when extrapolated to individual businesses may be even more surprising still, demonstrating that there are other ways to improve cash flow and boost the bottom line which are often more powerful than aggressively pursuing new business as the main priority.
It is of course important to consider these figures in the ‘real world’. An increase in prices may lead to a reduction in sales volume, but as can be seen in the example above, the business may be able to absorb some of the volume reduction and yet still be able to generate more profit and, critically in these times, more cash.
Actively exploring the impact of KPI (or “driver”) changes (whether it be price, volume, debtors, creditors, direct costs etc) on cash flow, profitability and business value is a critical exercise to undertake, especially when the “sell more, earn more” mantra may actually be totally inappropriate – or a false economy. The QUAD sensitivity model from Tectona does precisely this, and in real time. And better still, it ranks those drivers in order of their ability to generate cash and estimates just how much cash might be released.
To learn more about QUAD from Tectona, please contact Ronnie Epstein on 07543 275902 or firstname.lastname@example.org.