Finance
Issue 1:
5 recommendations for Finance Directors in 2024
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1. Identify your niche and pricing strategy
Quite often, a business will throw everything they have at anything that looks and feels like a customer they can serve and sell too. Too often, they do this without thinking beyond the sale and considering: Will it scale over time? What is the ability to build out from? Can they afford our service or offering?
It's incumbent on business leaders to ask themselves: “Are we trying to serve everyone? Or can we focus on a smaller subset of client opportunities within our industry? Can we look to sell more at higher margin, in effect becoming a niche player?”
Many of the best businesses and highest margins are niches. This is where you can often sell at higher prices, whilst maintaining your costs. As a rule, you will generate a significantly higher margin over the long term.
2. Ensure your customers pay on time
Currently one of the biggest issues I am seeing is defaulting on payment. Whether in the build environment, retail or B2B businesses, customers are defaulting on payment more frequently.
If you have a client who defaults, in the first instance, it's painful. But it can be ruinous. However there are schemes to recover funds lost, but don't hold your breath.
The better approach is to be upfront and lower the risk of default. So this means getting payment in advance. One of my clients now collects 50% before scheduling work to be done, 25% before setting foot on the client premises, and invoicing just 25% after completion.
As a business you need to minimise the 'at risk' portion of payment. We'll see more defaults before the economy picks up next year!
3. Constantly look to upscale your offering
One of the big mistakes for any business is to NOT ‘Upscale’. Higher margins will be obtained where you can 'take price'.
You should be constantly looking for ways to both lower your cost of sales (CoS) and maximise the value you generate Any business not doing this will likely suffer eroding margins over time. This leads to value destruction, when business should be about 'creating value’.
Always be looking to offer a new service at a higher price point. Price in tiers and offer: Bronze, Silver, Gold, and price each with considerable upside value in the content / product offered. It won't always work. But, over time, seeking to expand the offer and maximise margin potential will lead to the value creation opportunity you need.
4. Build value in your business
Over time, value creation will determine whether your business survives or thrives. We all want the latter, but in order to thrive and scale over time, you must create value.
Whatever the mechanism, value creation is what you seek. This may be through being the low cost provider in a niche, or higher volumes sold, or the best margin in your industry / sub industry.
Apple weren't the largest smartphone provider by volume for a decade or more, only recently overtaking Samsung. But they ALWAYS generated and retained the vast majority of the margins and profitability in the industry. This was often north of 80%. The reason they are valued in the trillions of dollars, is because they 'create value' that accrues to their shareholders.
5. Focus on becoming known
In my experience, you'll never really create valuable business without becoming well known, whatever it's for. If you don't have a brand that conveys your offer and how clients and customers feel toward your business, you'll likely not create value.
That means you and your offer needs to be known. You’d be surprised at how many businesses fail because they don't achieve this.
Startups often never get off the ground if there is no product market fit - a situation where demand does not exist. But more often they fail because no one knows who they are or what product or service they offer.
So investing in brand and marketing is critical. I've long maintained you should drop 10% of your revenue to your marketing budget. If you aren’t, and your competitor is willing to do so, they'll likely outsell you. They'll scale, likely grabbing most of the margin and profit in your market. Invest in your brand and marketing. Alas, if you don’t, you may not survive.
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Rob Nicholls is a CFO and strategic advisor. He partners with business leaders to unlock potential through margin optimisation, profit maximisation and value creation. He also plays golf.
You can contact him here.
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To read more about how your brand can increase your margin, take a look at page 134 of Brand in the Boardroom. You can find a copy here.
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If you would like to have a chat about what we have discussed in this post, please do get in touch.