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Do you differentiate between strategies that focus on top-line growth versus the bottom line? These are two very different approaches, and many business owners do not distinguish between them. When you grow the top line, you focus on increasing revenues. When you manage the bottom line, you're really managing expenses. Understanding the importance of both top line growth and bottom line management will help you find the balance that is best for your company.
Revenue Growth
Concentrating on revenue growth means expanding your business. Your focus is to proactively acquire and retain more customers. This often means going beyond your regular business operations. Your strategic objective is to discover and invest in new markets for your products and services.
Most businesses tend to focus on revenue growth during good economic times. It is easier to justify incremental investment when business is good and profits are up. But focusing on revenue growth during a downturn can be a great positioning strategy. Your company is ready to leap forward once the economic environment has improved.
One critical element for revenue growth is your marketing plan. Simply stated, you need a good marketing plan in order to generate new business and grow the top line. It doesn't matter if you have the best product or service in the world—if you don't market effectively, no one will know about it. See if you can adapt any of these growth strategies for your marketing plan:
• Find new ways to advertise or promote your business. Think about going outside your usual marketing strategies. For example, you could become a significant business sponsor for a local 10K race for charity. In exchange for being a lead sponsor, your company's name and logo could appear on T-shirts and other accessories used by the runners.
Aside from the priceless PR value on the evening news, your company will have the residual benefit that the race participants will continue to wear those T-shirts long after the race. In addition, you will have a built-in, natural networking opportunity with other business leaders who will be involved with this charity event.
• Establish a cross-marketing campaign with a non-competing company. A wood flooring company may partner with a plumbing fixtures contractor to reach potential clients, such as homeowners who renovate. Another example is the Internet, which may represent a new distribution channel to reach a different clientele.
When exploring new distribution channels, make sure you do market research in advance. Understand what works best for your business. Some channels will be more appropriate for retailers, for example, while others may be preferable for wholesale or distribution companies. There can be a relatively high cost of entry to access new distribution channels, so do your homework.
• Consider line extensions. This is the creation of new products or services that are similar to your current offerings. As an example, Chicken McNuggets represented a line extension for McDonalds.
Line extensions are usually created to target a different constituency. You want to continue being known for your core business, but the line extension offers additional versatility and revenue potential. Before launching a line extension, do the appropriate research. Establish clear return on investment (ROI) targets so that you can tangibly measure the results. For example, a wood flooring contractor might consider also building stairs if he perceives a great demand for that among his customers.
• Acquire another company. Sometimes the best strategy is to acquire another company that has complementary products and services that naturally fit into your market. Again, make sure that you use proper due diligence before moving forward.
This is particularly important if you are buying a going concern, not just inventory. The biggest challenge here is to make sure that you can successfully integrate the people from the acquired company into your business. If these people are essential to the smooth operation of the business, you want to make sure that they have incentive to stay with you once the acquisition has occurred.
Financial Analysis
There are several ways to ensure that your revenue growth strategies are financially successful. Try these methods to measure your success:
• Look at your marketing investment. You will have initial and ongoing marketing expenses in order to execute most of these growth strategies. Establish a marketing budget and determine an appropriate return on investment. For example,the marketing cost for a new distribution channel may be $75,000. While this maybe a big cash expense on the front end,you may project $300,000 of incremental revenue over the next 18 months.
• Track new or incremental revenues. Another way to measure the success of your revenue growth strategies is to specifically track revenues that are derived from the new effort. Use your accounting software to earmark the new business. You may want to track this on a daily, weekly or monthly basis, to understand the timing of revenues from the new campaign.
• Determine hurdle rates. In other cases, you should determine an "ROI hurdle rate," or internal rate of return. In other words, what is your break-even point when revenue equals expenses for your new marketing efforts. Work with your accountant or financial advisor to use a rate that is appropriate for evaluating your specific investment.
Focusing on the top line can be an invigorating time for any business. It is stimulating to concentrate on new markets, new client opportunities and new distribution channels. It is important to evaluate the financial return of these investments. In addition to validating your strategy, it can provide invaluable information for future revenue growth projects.
Managing the Bottom Line
Managing the bottom line requires a different emphasis from managing the top line, or managing for growth. Bottom line focus is actually a surrogate for expense management. Many publicly held companies focus on the bottom line, for example, as net income and related measurements influence everything from earnings per share to cash flow.
Owners of privately held companies manage the bottom line differently from those who are really managing Wall Street. Think of it as increasing the productivity and yield of your employable assets. A word of advice from the beginning: Managing expenses doesn't mean slash and burn—it means budgeting the various expense categories and understanding where the business generates the most return. You should look at:
• Cost of goods sold. This is an important category for manufacturers. Companies get trapped when they purchase raw materials in higher quantities than they actually need in order to get a good price. The outcome is that your cash is tied up n inventory and warehousing expenses until future sales are made. The cost of extra inventory can kill a business.
The Internet has brought tremendous efficiencies in the B2B (business-to-business) markets, particularly for manufacturers. It may be well worth your time to investigate B2B resources. You may be able to find new sources for materials and lower your cost of goods sold.
• Breaking down selling, general and administrative (SG&A) expenses. Traditional accounting aggregates SG&A expenses into one category. This makes little sense today, because virtually all non-manufacturing businesses' expenses are in these categories. Breaking down these variable expenses is essential to managing the bottom line.
• Marketing expenses. The old adage that you need to spend money to make money holds true when we look at marketing expenses. Marketing expenses are best based on a percentage of sales. It isup to you to determine the best types of marketing expenses, such as advertising(print, radio, TV, cable or Internet), promotion, public relations, trade shows, etc. Analyze past marketing investments and determine which have paid off the most in terms of incremental revenue. Review these expenses on an ongoing basis to make sure you are allocating them for maximum return to the business.
• Selling expenses. Selling expenses represent a huge outlay for many businesses, and one that is hard to track and manage. Do you pay your salespeople on commission, salary or a combination of both. Do they have a liberal use of expense accounts. How are expense accounts tracked. Start by deciding what percentage of sales is an appropriate measure for your business. Then determine how much of that is direct selling expense and what is a reasonable outlay for travel and entertainment, vehicle leasing and other related expenses.
A related expense pertains to training and development. Professional salespeople need professional development. If you think you're saving money by skimping on these expenses, you're being shortsighted. Invest in appropriate ongoing training to keep your salespeople at their best. Keep records of changes in closing ratios, the sales cycle and other measures that document positive outcomes. If any of your salespeople consistently yield weak results, replace them.
• Administrative expenses. This is a big catchall. It includes rent, administrative salaries and all of the overhead expenses. A lot can get buried into this category, so here are some tips:
1) If your business has multiple locations, check for purchasing redundancies and eliminate them.
2) Comparison shop among couriers to make sure you are getting the best deal for your volume of overnight packages. If your company frequently uses overnight mail, see if there is room to change to second-day air.
3) If you have high printing bills, periodically get bids from other printers. You want to have relationships with your vendors; however, make sure that no one is getting fat and happy at your expense.
4) Your office lease can be a hefty expense. Negotiate based on comparable rents in the area. If you have extra space, consider subletting it.
In addition to these overhead expenses, evaluate what is being outsourced and what is being handled within the company. For example, it makes sense for a marketing firm to employ graphic designers. But if you have limited design needs, it's better to outsource.
Also, evaluate the relationships with your professional service providers: your CPA, attorney, insurance brokers,business advisors, etc. Most small businesses outsource these functions. The question is whether the people who serve you are acting as your partners and work with you to grow the business,or if they treat you transactionally. A retainer arrangement may give you a more cost-effective return on investment if you have ongoing needs.
It All Adds Up
If you budget these different categories as a percent of sales, you'll find that shaving a half percent here, a quarter percent there can add up to some significant dollars.
For a company with $5 million in sales, a cumulative 1.25 percent reduction in expenses means $62,500 in annual savings.
Some business owners are great boot strappers and have mastered the art of budgeting and managing expenses. Just make sure that you aren't pennywise and pound foolish. That inevitably results in the need for an expensive solution to undo something that didn't work when you tried to cut corners.
Where should you spend your time—focusing on revenue growth or managing the bottom line. The answer, of course,is to make sure that you put appropriate emphasis on both areas. Remember not to concentrate on one to the exclusion of the other. Both are important for healthy, ongoing growth.