May 20, 2016
How does your company improve profitability? And who is responsible for this growth?
These were two of the core questions we – in collaboration with CFO Research – asked in a survey of more than 100 senior finance executives in companies with $1+ billion in revenue. As you’d expect, the results pointed to finance as the current guardians of profit growth, but the future outlook pointed to a much broader, more collaborative effort.
While many of the respondents came from growing companies, the overwhelming majority of those surveyed (73 percent) agreed it will become more difficult to improve margins and profitability in the next two years. This increasing pressure for margin growth is only compounded by the 84 percent of respondents that believe finance needs to be integral in the improvement of enterprise profitability.
So, from these results, it seems as if finance is putting the onus of profit growth on themselves, but this is only partially the case. The survey also looked to discern the main ways in which industry leaders increase profitability and, predictably, cost was a deciding factor.
A plurality of respondents selected cost cutting as their go-to method of increasing profit. However, when prompted to explain what did not work, many survey participants cited cost cutting as the catalyst of unachieved benchmarks. The recurring theme was “short-term viability.” Simply put, cost cutting as a method of profit growth does not yield sustainable results.
Further complications to profitability arose from the increasing complexity that comes with running a sizable business. For businesses with $10+ billion in revenue, 41 percent of respondents selected poor communication between teams as one of their top internal challenges. Compare this with 25 percent of respondents from companies with $1-10 billion in revenue and it’s clear the complexity of business operations play a significant role in profit and margin expansion.
This communication is key for everyone operating a growing business, not just our survey respondents. If finance is shouldering the load when determining profit growth strategies, they surely need to communicate across departmental lines when looking to execute upon them.
Understanding Profitability Drivers
Here is where we discovered one of the most telling data points. Most survey respondents (60 percent) believe their sales organization has an average, below average, or unacceptable understanding of their company’s profitability drivers.
If finance lacks trust in their sales representatives – their organization’s frontline to profitability – how are they expected to execute on profit and margin growth strategies?
Herein lies the problem facing businesses in an increasingly challenging and volatile market: how can finance, the guardians of profit growth, include sales in the process?
More than 80 percent of respondents agreed a close relationship between finance and sales is crucial to improving profitability. So what’s stopping this from happening?
The solution begins with the tools given to finance. As I mentioned above, lack of communication was frequently placed in the top three for internal challenges to profitability. The two other most popular choices were (1) inefficient or outdated technology and (2) a lack of visibility into cost or performance data. If finance can’t see what’s going on in your company’s data, they won’t be able to disseminate the relevant information to the right people.
Finance needs to see everything, but they also need to know where to look. With data increasing in quantity and complexity, the tech must simplify the representation of the analysis to provide efficiency and visibility. Whether looking into customer data, competitive intelligence or internal transaction history, finance professionals need a simple way to segregate and apply the data to the current market and business environment affecting the organization’s deals.
Once finance has the ability to see the data, the collaboration between sales and finance can begin in earnest.
Understanding What Sales Needs
The most crucial first step to take is not related to sales’ understanding, but actually to finance’s. Since 39 percent of respondents believe sales reps rely more on their own skills and experience than data, they have to be able to show the sales rep what will help them in negotiations. For this to occur, finance must know what sales needs.
Customer information is the biggest example, as 74 percent of respondents recognize it as a decisive factor in helping the sales force improve profitability. But it is important to also understand everything on a customer-by-customer basis. Have certain customers traditionally bought more? Is a specific region prone to buying less during a particular season? Is there anything happening in the market that will impact buying patterns?
Sales representatives have close relationships with their clients. With granular data points like those mentioned above, reps can combine the data with their own knowledge of the deal. In my experience, the results of focusing on the value and profitability of each and every deal has an enormous impact on margin, revenue, and overall profitability.
With the right tools in place, finance has the requisite visibility to identify when and where your company can improve profitability. From there, they will be able to share this information with the sales force, which can use these analyses to feel more confident in their negotiations.
Customers and competitors are increasingly knowledgeable, making the ability to increase margins more difficult. If your company is looking to positively—and sustainably— impact its profitability (and who isn’t), a swift change in direction from the traditional profit growth strategies to a data-based collaboration between finance and sales improves overall performance and protects your business from dips in profitability.