As an international business coach, Jacob Aldridge, Director of Strategic Advisory at accounting firm Business Depot, has helped more than 300 mid-sized businesses improve their financial position.
He identifies three key areas companies should focus on to drive profits: product extensions, new channels and setting a capacity growth plan.
Product extensions leverage existing expertise and market knowledge. “As a rule, a company's second product or service is always more profitable than its first," says Aldridge.
Opening new channels need not necessarily mean extensive geographic investment. “When a business is clear about its cost base, sourcing channel partners can rapidly increase volume of sales with minimal deterioration of margin," Aldridge explains.
Setting a capacity growth plan gives the CFO greater understanding of the company's resources and constraints, and helps to surface hidden waste.
Says Aldridge: “While most companies pursue incremental growth, based on top line revenue figures, implementing a capacity model allows a business to focus on profitable sweet spots in their journey. “The biggest mistake I see profit-seeking mid-market businesses make is growing revenue instead of profits, on the belief it will trickle down to their bottom line. This is rarely the case."
Many businesses start with a single product or service, and it is usually something the business owner or co-founders are good at producing. Over time, as they grow, they build a client base and improve on their product.
“They will usually build a team to help sell, build or deliver their product as well, and the founder's focus shifts to team management rather than working with clients," explains Aldridge." As a result, they miss the greatest opportunity for new sources of profit, which is adding additional products or services to their business."
He says there are two reasons why new products are usually more profitable than the original one. First, the business doesn't need to spend time and money finding customers. They can simply roll out the new product into the existing client base.
Second, and perhaps more importantly, the business now has a much greater understanding of its customers' needs than it did when it began.
“A mid-market business will usually have a large client base. Having a client-facing team listening for common problems in the market generates opportunities to create and sell solutions to resolve those problems," says Aldridge.
Whereas many new businesses start with ideas that were generated in a basement, a mid-market business can extend its service line with a clear value proposition wrapped in a brand that its customers already trust.
CFOs can feel squashed between the nimble abilities of start-ups and the market power of bigger corporations. But the mid-market position can be an advantage. CFOs who continually find new profit sources typically see their business as being perfectly placed to out-manoeuvre corporations while leveraging their overall market experience. According to Aldridge, this is best evidenced through referral partnerships, where a company sells their products or services through partners rather than doing it all themselves.
For example, many Australian businesses compete to sell products to supermarkets. Their leaders know that the increased volume achieved through supermarket sales will allow them to increase both revenue and profit, even if they have to reduce their margins slightly.
“Mid-market businesses need to think like those product companies. Rather than owning the whole customer journey from sales to delivery, aim to partner with other companies who have existing market access. This will allow you to increase your profits by providing your services to their clients, and if you can't systemise your product in order to do so then you've just discovered some major business inefficiencies you need to work on," Aldridge advises.
Capacity growth plan
Aldridge says "growth" can be a dangerous word in business, because it means different things to different people. “In business, many people equate growth with revenue growth, which can mean they ignore the desirable outcome of more profit," he observes. "It is much better to focus on profit growth, which means reviewing the capacity of your business - how much revenue you can realistically generate - against your actual utilisation."
According to Aldridge's figures, most Australian businesses are running at between 60% and 80% of their realistic capacity.
“The gap represents waste and inefficiencies in these business, and that waste comes directly from their bottom line. When I work with my business consulting clients I look for waste across six categories, but the most common in mid-market businesses are poor sales systems, a dysfunctional organisational structure and a lack of useful business data," he explains.
Simply redefining roles and responsibilities, implementing a simple set of meaningful key performance indicators, and switching the sales process from salesperson to customer-centric can mean a significant uplift in revenue. Since these changes don't mean increasing staffing levels, most of the benefit goes straight to the bottom line as profit. Aldridge says there could even be opportunities to redeploy staff more effectively, since "you'll normally have more time in your week than before."
Aldridge's key message for CFOs is to pursue all three of these paths to drive the business forward. Start with product extensions, then moving on to exploring new channels, before ultimately developing a robust capacity growth plan. Take it step by step and measure your results along the way, to ensure you're focusing on the areas of the business that have the most potential to drive your business forward in the future.
Three ways to generate new revenue sources:
- Product extensions
- New markets
- A capacity growth plan