Thought Piece

Sometimes the most obvious solution is overlooked. Talking one client's problems over with Peter Charles, it was clear that the company simply wasn't selling enough. Once the issue was out in the open and acknowledged we were able to come up with some interesting ideas that did generate better sales.

Working with one client we realised that if they could sell more, even at cost, the overall profit of the company would rise substantially. Why? Because if they purchased a greater volume they could successfully negotiate a greater discount.

Increased profitability is an area that every company — whether in trouble or not — should explore. If you ask companies what profit they make from particular customers or product lines, the answer is often a blank stare, an embarrassed shuffle of the feet and a promise to get back to you. Don't worry, you're not alone. The analysis of what you are selling and to whom, once completed, is usually fascinating and can turn preconceptions on their head: clients that were viewed as the most important can turn out to be actually costing the company money. The sales, the selling price and the direct cost of sales are all elements that need careful thought.

It is easy to get caught up in the here and now but any sales analysis has to start with looking back. How do sales compare over the last two or three years? Often they are not moving more than in line with inflation, or even eroding. A margin comparison is also imperative: it is common to find that not only is the level of sales stagnating but margins are being eroded with the inevitable downward impact on the bottom line. Businesses dismiss, at their peril, the old cliché "turnover is vanity, profit is sanity".

We have sat with financial controllers tearing their hair out because the figures looked dire, while the sales team has been in the pub celebrating the illusion of another successful month. This is because in many companies, financial control, sales and purchasing still don't talk to each other. People are busy buying or selling so it is understandable that they don't tell each other, "this is costing more" or "we can't sell this for that price", but a communication mechanism is needed and that includes having an accounting system in place which allows that information to be extracted. And you have to keep checking that what you think to be true, actually is — because circumstances change (see Box 2).

Often these problems arise because no one is actually is charged with having an overview or having the authority to challenge why product X is sold at price Y. Whoever performs the overview has to raise awareness of the actual cost to the company of the favourite incentives that the sales force may use to close the deal. How much does free maintenance or a year's free training actually cost? And what is the impact, on those departments and their finite resources, of being used in this way. Internally the real profit on the deal has to be known but the internal accounting is of no interest to the client.

It is not easy having this conversation with the sales team, if you are stopping them giving free training, if they have been used to throwing that in as a sweetener. Sales people will often complain of how tough it is to close the sale at the best of times. I know all that because I was in sales for many years and I also know that such a move is often the only course. But in the end sales can be made without the crutch of an expensive give away. It may not even be that valued by the customer.

One controversial change I helped to push through was switching commission from gross sales to profits. In the end the board had to approve the switch — anyone can sell a tenner for a fiver — the old system just wasn't sustainable. Understandably, while not wanting to bankrupt the company, the sales person is focussed on making the next sale and collecting the resulting commission.

Each commercial decision is unique and in the end comes back to a judgement of what to do in a particular situation. But that judgement has to be backed up with decent analysis.
The bottom line is that although there's always a limit to how much you can cut costs, there's no such limit to increasing the profitability of sales and even sales themselves.

Banks are not charities. But they do calculate the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they are sometimes accused of.

That brings us to the role of the banks, so often the largest creditor and certainly the one with the most intimate knowledge of how a company is faring. We all love a stereotype and the heartless, faceless bank pulling the plug on sound businesses over a minor blip sits deep in the business consciousness. But not all banks fit this caricature. "We want to work with management of a business facing difficulties to help identify the issues and provide solutions to get them back on track," says a senior manager with a leading retail bank. "We can make the most impact when the problems are identified early. We are keen for management to be open with us."

Banks are not charities. But they do calculate the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they are sometimes accused of. Most solutions to business difficulties involve access to more funds and/or different products (hedging, leasing, factoring) and that all adds up to continued and profitable involvement for the bank.

A Repositioning Turnaround may mean divestment of a troublesome subsidiary. It may mean embarking on (yet another) cost-cutting exercise, including turning away revenue opportunities if they are not of a sufficiently high margin. It most certainly involves a first step of getting an impartial and pragmatic overview of what the problem actually is, from Turnaround Professionals who also know the kind of language with which to talk to banks. The moment you take this kind of decisive action, you're likely to discover that there's no crisis, no drama, only urgent action that must start now.

Peter Charles 2010