How do I improve my sales profitability?

Improving sales and margin are key to delivering profitable growth. 

It is not just about increased volumes. It is really important first of all to understand your existing sales base, from the point of view of sales channels, product mix and client mix. If you understand the build-up of your overall sales, it is easier to then take actions to improve the base.

You should also have a good idea of how reliant your sales are on your major customers, i.e. what percentage of your sales is made up of the Top 5 or Top 10 customers. If the major customers represent a very large share of total sales, it would be advisable to take action to build up a broader portfolio to balance the risk.

Geographical expansion, whether to new areas of the country or into an overseas territory, is often a route to further growth, but you will need a sound understanding of the infrastructure investment required to penetrate the new geography.

Leveraging online sales vs. traditional methods can also provide potential growth opportunities in a cost effective way. The Covid-19 pandemic has accelerated the shift to online sales for many businesses and provided a boon to those with an already strong online presence, but you need to continually review and alalyse your strike rate to ensure you  are optimising your revenue potential. 

Another area to facilitate delivery of profitable sales growth is having a good idea of the total ‘cost to serve’, whether that be of a product or service, including cost of sales, distribution, overheads and profit contribution, to make sure that you are pricing the offering optimally. However, setting price points is clearly not just an internal ‘cost plus’ exercise. Competition and market dynamics will also affect the pricing. Also understanding the ability to ‘cross-sell’ different products and services may affect your decision on how to optimally price, to achieve the highest profit growth. 

Moreover, it doesn’t stop at the Profit and Loss Account view. It is vital to manage working capital in an effective manner to avoid the scaling-up of the sales growth, putting stress on the business. You should have tight control of both Accounts Receivable, Accounts Payable and inventories throughout the process, to avoid too much demand on cash being tied up in net working capital as you grow. Profits may be on the up, but you also want to ensure that cashflow improves commensurately.

Lastly, planning and performance measurement are key to ensure profitable sales growth. These encompass establishing the targets you want to set for sales channel and client growth, setting the right targets for your sales teams, having a focussed view on optimal pricing in the prevailing market conditions, having production and supply chain systems capable of delivering against the growth, and knowing the working capital requirements to deliver.  You should wrap together all these plans and associated actions in your business forecast. Then execute against the plan, but measure performance on an ongoing basis, to ensure your plan is on track or to determine whether additional actions or programmes are required. Agility and the ability to alter a plan when obstacles occur is absolutely vital.

Hugh Reynolds
Portfolio Director