I am a great fan of Greg Savage (https://gregsavage.com.au). His experience in the recruitment industry is remarkable. His ability to translate that experience across more than just the recruitment industry is a tribute to him.
I want to speak about his latest article which has the catchphrase “Revenue is Vanity. Profit is Sanity. Cash is Reality” (https://gregsavage.com.au/2020/08/11/go-away-psa-farewell-psl/).
Greg is giving us all the valuable advice that could just ensure our survival. In summary, Greg has covered his experience with a particular company who were reducing their gross margin to get revenue, only to significantly reduce profitability and cash flow. The decision to reduce revenue, or not chase revenue for top line growth, is a difficult one. Our egos often get in the way, leading to revenue growth at all costs.
There is a need to understand the real cost of providing a service. This real cost includes the cost of forgone business and business development in chasing and servicing low margin accounts. We do not operate in an environment with unlimited resources. Therefore, in order to do one thing, we must forgo something else.
So, back to Greg’s example. In servicing a low margin account, the company had forgone the opportunity to utilise its valuable resources elsewhere. These resources included the time (and salaries) of recruiters, administration staff and particularly highly skilled contractors. The result was that the resources available were wasted on low margin cleints.
The solution was not so simple. There had to be a change in mindset and a stroking of bruised egos. The message was however simple, forget vanity, remember profit and bank the difference.
I have been involved in several operations facing the same dilemma. Case number one included cutting revenue by 40%, which resulted in taking a loss-making company to a profitable one. The analysis that led to this decision showed that specific clients were taking up 70% of the resources of the company and at the same time costing money even at the gross level. It literally cost the company real dollars to service these clients. There was no profit, only revenue. Elimination of these accounts immediately returned the company to profit and allowed the focus to return to business development and the retention of the profitable clients.
Case number two – the company looked at its portfolio of products and the resources involved. The review focussed on looking at the return on investment. A benchmark level was set, and then the bottom performers were cut from the portfolio, enabling the company to re-allocate resources to new products. This industry was continually changing, and it was essential to ensure that there was a pipeline of new products. Some of these new products were not successful and after the grace period would be cut. This approach often seemed brutal, and while some of the deleted products ere still making small profits, some of the new ones quickly out performed the internal metrics, ensuring the company’s continuing competitiveness and growth in profitability.
The point is that you must be careful to ensure that you are looking after your company—driving profits, not revenue, using resources wisely. While revenue is essential as we can not be profitable without it, it must be profitable revenue. Clients are essential and should be well serviced, but they should also pay a fair price for that service. Without a reasonable price, we are merely driving our company into bankruptcy. Our clients may even be sad at our demise, but they will then move to the next provider without a look back.
So can you answer the question – what are you holding onto that is holding you back? Is it poor clients? Is it outdated systems? What are you testing to see how you can improve your productivity and profitability? Look carefully and what and how you are doing things to ensure that you are improving and not going backwards. Your competition is not standing still even in these uncertain times.
Loyalty is to ourselves first, so that we remain around long enough to show the excellent service that we know we can provide. And use our resources wisely – don’t waste them on unprofitable clients or business practices.