Pathfinder – Business update – Business question of the month (July 2019)

Tim Levey, Partner, Chairman and Head of Business Advisory, runs two groups of Business Leaders in Kent under the Intelligo brand. One of the members recently posed the following question:

“When looking at increasing net margin, what do you all focus on most? Reducing costs, or increasing revenue? If both, what percentage do you focus on each?”

Reactions from the group included:

1. “It’s not just about turnover, it’s about improving efficiency. We went through a stage of putting procedures in place for buying and incentives for running projects better. That improved the margin significantly. So, plugging holes and looking closer at how you are buying would be my first port of call.”
2. “We continually seek to reduce our costs by improving productivity and minimising the costs of materials, while ensuring the quality of materials stays high. A lot of things are industry specific though. There are things that I can do but others of you can’t and vice versa.”
3. “Both! You can’t cut costs to profit or save your way to prosperity.”
   This comment led to a discussion about quality. It was argued that as long as materials are compliant and installed properly the quality does not falter. Members of the group debated that there’s a Rolls Royce version of everything, but that doesn’t mean that cheaper alternatives are poor quality.
4. “You can only cut costs so much, and it’s not just about reducing cost, it’s about cost allocation. A portion of costs will drive business growth. Strip out unnecessary costs and reallocate this amount to costs that drive growth”.
5. “Establish where the low hanging fruit is – if you feel that you are controlling costs poorly then focus on this for a quick win. If you assess your costs to be under control, then sales alone may be where you should focus. But, more frequently it is not sales volume that wins, but decent margin work. One year my margin leapt simply because I found better margin work, while the turnover was similar. Sometimes you can attack all three areas at once”.
6. “You could raise your prices by 5%. You might lose the odd customer but providing your service is good, you will come out ahead”.

In light of the above comments, the member who posed the initial question sat down to look at their business as a whole and assess the management accounts. However, this review session was cut short as they found that the more overtly pressing work required to achieve the day-to-day running of the business took precedence. Sound familiar? When recounting this to the group a follow-on discussion emerged about the need to make time to stand back and work “on the business” rather than “in the business”. It was also commented that professional practices in particular tend to be owned by people who are meant to manage and grow the business, but they are also usually the biggest and most important fee earners – a difficult balancing act to sustain.

If you would like to join one of the Intelligo Business Leader groups that discuss these types of issues then I would be interested to hear from you. Please contact tim.levey@krestonreeves.com or on +44 (0)330 124 1399.

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