Managing Cash and Optimizing Profits – Math Behind Growth
If you think your CFO’s contribution to increased profitability is only from cutting costs, think again — you may be looking past your biggest pro-growth asset.
A New Attitude: CFO as “Growth Strategist”
A CFO’s job is to spend money. That’s right… spend money. The association with finance executives and cutting costs has twisted the true function of your top finance executive. The CFO pays employee wages, pays vendors, pays taxes, pays rent, pays benefits, pays utilities. They are constantly spending money. And yet the association with CFOs as an agent for growth and profitability is almost non-existent. That’s a mistake.
Since the CFO is the biggest spender in your company they also know where the money is best spent. Here are three ways to leverage a CFO or finance executive’s capabilities to increase margins:
1. Understanding the Math behind Growth – In a typical company a 1% improvement (increase) in your price will generally create an 11% increase in operating profit. Let’s repeat that: a 1% improvement in price will create an 11% increase in profit.
By contrast, a 1% improvement in variable costs gives you a 7% increase in profitability and a 1% improvement in fixed costs gives you only a 3% profitability bump. We naturally turn to CFOs to help improve costs but do we bend their ear about pricing? What
about discount incentives or pricing inventory for clearance, promotions, or incentives?
An experienced and strategically-minded CFO should have a seat atthe table when setting prices, discounts and contract-terms for your company.
2. Add Value First, Reduce Costs Second -This dovetails with the math of point #1. Instead of just seeking to take costs down by 10% (you shouldn’t stop trying to do that), also look to add value that will justify a sales price increase of 10%. What services an features can be added inexpensively? Added value equals higher margin gain. Customers will expect you to pass costs savings onto them anyway so look first at adding value, benefits, margins, such as more expensive warrantees before reducing costs.
3. Looking Under the Right Rocks (for Costs) – Most organizations will look to attack costs where they “feel” things are the most wasteful. Bad idea. You need to prioritize the search for cost improvements by tackling the largest dollar chunks in the product/service production and delivery stream. For example, if you produce a $100 product that costs $10 for assembly and $50 for key components, but you know your assembly has excess costs in it, don’t waste time in the $10 assembly system – go immediately to key components. Maybe you can shop for new component vendors or change the contract structure.
You can engineer-out more dollars attacking big items than you can in sweating out more efficient operations.