When the economy is buoyant, everyone can grow their revenue without having to steal market share from each other. But growing revenue in a flat or contracting economy usually means taking market share from competitors—and that typically translates to offering consumers more value at a cheaper price using price promotions and providing additional services free of charge.
Clearly, such competition can be a recipe for disaster, and many companies prefer to look for revenue growth in less competitive niches. But this too can be problematic. Securing meaningful revenues by penetrating smaller market segments requires additional investments in product development and marketing. Operating costs also tend to increase because of smaller manufacturing runs and greater complexity in support functions. So while you may be enjoying top-line revenue growth, it’s easy to get caught up with your bottom line results as they keep falling further behind. Sure, it’s growth—but since it’s unprofitable, it’s “bad” growth.
3 steps to “good” growth
Finance plays an important role in shaping the discussion on growth, and “good” growth delivers increases in top-line revenue and bottom-line profitability. Here are a few top tips for making that happen:
Step 1: Understand the assumptions behind the strategy
- Adding new product variants and selling through new channels means increased complexity and additional resource requirements in manufacturing, supply chain, and support functions such as IT and financial operations. Finance should work department leaders to identify and challenge the assumptions that underpin the strategy. They should also collaborate with operations and support teams to understand how the strategy may impact future resource requirements and expenses.
Step 2: Ensure incremental products are accurately costed
- If you start with erroneous product costs, you risk making misguided decisions about prices and discounts. Companies that rely on simple categories to determine product costing typically over-cost high-volume products and under-cost low-volume products. They also frequently fail to accurately reflect how different products consume resources and incur back-office costs.
To improve accuracy, product costs should always reflect the cause-and-effect relationship of the amount of resources and costs each product and product variant consumes in all areas of the business.
Step 3: Project product costs into the future
- Costs will change as sales increase, so model future costs alongside future revenues to identify when products break into profit. Establishing this will also give a timeline against which to monitor progress so that failing products can be quickly and efficiently culled without incurring further losses.
Accurate product costing requires an activity-based methodology that is underpinned by true causation. This is exactly what is built into the Anaplan Activity-Based Costing app, from Anaplan partner BetterVu. It can be used on a standalone basis or integrated into other Anaplan planning, budgeting, and forecasting app models to understand future profitability. That way, those responsible for driving growth can better understand how the assumptions that underpin their new business initiatives impact future costs. Read more about the Activity-Based Costing app here.