For the past several planning cycles, business leaders across industries have been waiting for a recession that seemed imminent. But recession predictions have been continuously delayed as a steady stream of better-than-expected data on jobs, inflation and consumer sentiment brightens the immediate picture.
That means more CFOs are not as narrowly focused on cash preservation and cost cutting. CEOs and boards have given the green light to pursue the right opportunities to grow their businesses.
This cautious interest in growth is still a far cry from the grow-at-all-costs mindset of the boomtimes, but it does signal that more companies are no longer hunkering down and waiting for a storm to pass. Capital is still expensive as interest rates have soared to a 22-year high, meaning finance leaders are eschewing expensive and risky projects for ones that are safer bets and that may require less capital.
Leaders still are taking a hard look at their operations in search of ways to increase profit margins and boost the balance sheet. Put simply, CFOs and their teams are in search of efficient, profitable growth.
Let’s dive into seven strategies for CFOs looking for smart, measured ways to increase profit while also finding revenue growth.
7 Strategies to Grow Efficiently
1. Fine-Tune Your Forecast
Forecasts affect so many other key decisions — purchase orders, hiring plans, yearly sales goals — that increased accuracy can create a positive domino effect. They can prevent a software services business from over hiring or a retailer from ordering too much of a product with high seasonal demand. In the latter example, getting inventory right can speed up your cash conversion cycle because inventory will turn faster if you have the right items in stock.
Better forecasts start with accurate, up-to-date and comprehensive historical data. If you’re pulling data from multiple systems, they must be tightly integrated with the planning system so decisions are always based on timely information. The right system will then use that information to automatically update forecasts, which makes it more feasible to reassess forecasts frequently.
Leading software can also pull in external economic data, such as employment and inflation numbers, from government sources like the U.S. Department of Labor.
Some systems can also project cash flow, which is always top of mind for CFOs. Anticipating potential cash shortfalls before they happen is invaluable in a time when loans are historically expensive.
On the other hand, if the projections show a future cash surplus, you can use metrics such as the capital asset pricing model (CAPM) to determine where to invest that money for the best returns.
Connecting these more accurate forecasts to scenario planning can help CFOs and their teams understand how different outcomes or moves could affect their financial position. For example, what is the expected impact of investing free cash in stocks and bonds compared to using it to buy certain fixed assets? How much more cash would you have available in two months if you could reduce days sales outstanding by two days and extend days payable outstanding by four days?
Scenario planning helps you better understand and weigh your options to maximize efficient growth.
2. Double Down on Top Performers
Given the focus on profitability, it only makes sense to concentrate time and resources on the services or products that have the ideal mix of high profit margin and healthy sales volume. For product companies, keeping an eye out for slow-moving products is especially important as warehousing costs keep rising — they were up 8% year-over-year in mid-2023, according to WarehouseQuote.
Review recent and forecasted sales and profitability trends to group products or services into three or four tiers based on total gross profit margin, net profit margin or another metric that’s critical for your organization. You can also categorize these offerings by location and seasonality to account for natural fluctuations in demand.
There are other considerations to weigh in decisions to increase or trim investment in any products and services. For example, product lifecycle stage — is the product or service still on the steep upward part of the curve, or has the curve crested?
Also, factor operational requirements and complexity into these decisions. For example, does the product require unique raw materials, components or labor inputs? How do potential supply chain disruptions and labor shortages affect the cost and difficulty of acquiring these resources for product businesses?
Close coordination across the finance, marketing, sales and operations teams is essential during product rationalization. Marketing teams need to push goods or services with an ideal profile using targeted promotions, and operations needs to order or produce more of those products. Sales must know about your plan so they don’t oversell products you’re scaling back or eliminating to not upset key customers or cause other unexpected consequences.
Cutting products or services might not be the only answer. There may be opportunities to fix some of these poor profit performers by raising prices for products or services with strong demand or packaging them with value-added services for better margins. But, sometimes, there’s no logical path forward for a product or service, and it’s time to make the tough call to cut it.
3. Increase Your Supply Chain Efficiency and Resiliency
Inventory is a major cost for product companies and one that more CFOs should dig into because there are often big savings opportunities. You can start by reviewing the journey of goods once they come into your possession and look for the most common red flags.
Are carrying costs climbing and, with them, the risk of rising rates of obsolete inventory? Are order volume and frequency aligned with recent demand, or have they not been adjusted to reflect changes up or down? Core operational metrics such as inventory turnover ratio and sell-through rate can identify problems pulling down your bottom line.
Use metrics to guide questions about your warehouse and factory operations and look for inefficient steps that process improvement or technology could improve. For example, an increasing late shipment rate might lead the ops team to conclude you have too many warehouse employees picking items and not enough prepping them for shipment, leading to backlogs. Or maybe it makes long-term financial sense to bring logistics in-house as your sales and third-party logistics costs both rise.
There are bigger steps companies can take here as well. If scenario planning points to supply chain disruption as a major profit risk, you might look for new suppliers in different regions so a hurricane in one region doesn’t halt all shipments of a crucial material.
Many companies are looking to nearshore with suppliers and manufacturers that are closer to home — 42% of supply chain leaders took steps to nearshore in 2023, a 2.5x increase from the previous year, according to a McKinsey survey. Suppliers located closer to a product’s final destination means faster shipments, allowing you to place smaller orders and hold less inventory.
Shipping costs are usually much lower as well. And while it’s hard to calculate an exact ROI on avoiding a supply chain disruption, the alternative is often not being able to sell something customers want because you lack backup suppliers.
Done right, this kind of supply chain planning can help you grow efficiently by improving your cash conversion cycle, profitability and revenue growth through fewer stockouts and potentially lower costs.
4. Evaluate Divestiture Opportunities
The acquisition boom of the last few years has ended. Now there’s a potential knock-on effect of divestitures picking up soon. There were four acquisitions for every one divestiture in the last two years, according to PwC, and the firm predicts midmarket deals will drive activity as deal volume picks up.
Business units with a weak connection to the company’s core business model are hard to look past with capital being much more expensive. Divesting these units provides a prime opportunity for CFOs to free up capital.
The key is to identify business units that should be sold off as soon as possible and then close the deal quickly. To make this happen, executives can perform thorough portfolio reviews quarterly or biannually to identify potential divestiture candidates, which doubles the chance of delivering positive shareholder returns.
Fixing a business unit that’s not a good fit is usually not worth the time and effort. 57% of senior leaders admit trying to fix a unit decreased or did not change its value.
To determine what entities should be put on the market, identify and closely monitor performance metrics specific to the company’s business model and sector. If it’s clear you should move on, get the ball rolling quickly. Mitigate the negative perception of cutting ties among fellow executives and the board by explaining why it’s in the business’s best financial interests and laying out a clear plan for the funds from the sale.
5. Rebalance Your Capital Structure
The fast-rising cost of capital today means companies need to closely track and update their hurdle rates (the return required to pursue a certain project or initiative). Numerous metrics can determine your hurdle rate but weighted average cost of capital (WACC) is a popular one.
WACC looks at cost of equity and cost of debt to determine if the rate of return is high enough to justify the cost to fund the project. Interest rates make it relatively easy to identify the cost of debt, while cost of equity is usually calculated by using the CAPM.
The Federal Reserve’s frequent interest rate increases since March 2022 have made certain initiatives unviable. WACC helps businesses determine whether using $50,000 to purchase more inventory or buying a piece of warehouse automation equipment will generate a higher return, comparing the net present value of each investment. Is the expected return higher than the hurdle rate? CFOs can also use WACC to determine what mix of debt and equity financing is the best path to raising that $50,000.
Businesses should compare their current WACC to that of industry peers. If it’s high or even near the average, you should evaluate other financing strategies you may be neglecting or underutilizing. Even minor improvements can make a big difference.
6. Reduce Fixed Costs
While trimming fixed costs is hardly a groundbreaking idea, it is an area where companies may be overlooking clear wins. As hybrid or remote work takes hold, can you move into a smaller, cheaper office or reduce the total number of offices? This not only lowers rent or lease costs, but also related expenses including utilities, insurance and, if you own the space, property taxes.
Leasing equipment such as vehicles and machinery can also be a smart move. A lease boosts working capital because current assets only account for the next 12 months. That means a $250,000 machine might be leased for $2,500 per month, adding $30,000 to current liabilities (for the year) instead of removing $250,000 from current assets if you paid upfront. It’s also a welcome alternative to debt-financing assets in a time of still-rising interest rates.
Leasing gives you access to assets that will help your company capitalize on current opportunities and drive growth without the risk of buying an expensive asset. You can delay large investments until there is more certainty about the future of your business or the broader economy. Compared to owning, leasing can also boost your cash flow and give you a healthier quick ratio.
7. Keep Looking For Additional Automation Opportunities
An ever-increasing amount of work can be automated with technology — and yes, AI is part of that equation, but hardly the only option to consider. Finance chiefs know that automation means employees can spend more time on strategic work, and thus is essential in mitigating the impact of the finance labor shortage. But if you’re not sure where to start — or continue — with automation, try these:
- Financial reporting
Your financial system should be able to generate and instantly update reports with the latest data for complete and timely context about company performance. That translates to faster, better decision-making. - Payables
Accounts payable automation software can capture and verify key information from bills. Your staff can then pay these bills with a few clicks, eliminating much of the time and money spent processing invoices. - Payroll
Time-tracking and payroll systems make it easy to remit accurate, on-time paychecks to employees, freeing accounting staff to handle work that adds more value. - Account reconciliation
Software can automate many steps in your monthly close, including the reconciliations that most accountants dread. This has the added benefit of increasing the accuracy of reconciliations and, ultimately, key financial statements. It lets finance teams spend more time assessing financial performance and collaborating with executives and business unit leaders around those results.
While AI has captured the attention of executives and promises to eventually automate more complex financial tasks, CFOs should recognize that other types of automation may provide as much or even more value. The clean data and best practices needed to set up more basic automation can also serve as the building blocks for AI projects in the future.
Additionally, CFOs have had a head start in understanding the potential impact of AI thanks to their years of experience using capabilities such as robotic process automation (RPA) and machine learning (ML).
How Technology Helps Fuel Efficient Growth
Easy access to accurate information and reports from across your business is the foundation CFOs need to make prudent cost cuts and investments. That’s the kind of data that an ERP system provides.
NetSuite brings together all critical data on financials, operations, sales, customers and more, updating that information in real time. There are modules for accounting and finance, supply chain, CRM, human capital management and analytics that are designed to work together, with no need for complex and unreliable integrations.
Flexible reporting capabilities assist in several areas that boost efficiency. NetSuite dashboards and reports can break down the performance of products and services by your preferred metrics, highlighting key trends so you know what to promote and what to pull back on.
These reports can help you track the financial performance of different business units to show which could be candidates for divestiture and break down fixed costs to show where there are savings opportunities.
NetSuite has both the information and capabilities necessary to quickly pull together trustworthy sales forecasts. With NetSuite’s tools, you can view projected short-term cash flow in a single, digestible dashboard so they can plan accordingly.
By putting all your data in one place and connecting processes across departments, NetSuite opens the door to more automation across your business.
Key Takeaways
CFOs will have to lean on their deep financial know-how, experience and nuanced understanding of their businesses to determine the best path to profitable growth. Achieving it is no small feat, especially as some leaders struggle to move past the grow-at-all-costs mindset.
By taking the right steps now, businesses set themselves up for not only immediate success but long-term results that will help them stand above the competition. When purse strings loosen and interest rates finally come down, you want to be ready to capitalize, and making improvements now will put you in a position to do just that.
Need Help?
Our Technology Solutions Group includes a team of experienced solution experts who will work with you to understand and address the specific needs of your business. If you’d like to improve your organization's accounting and decision-making, contact us online or give us a call at 410.685.5512.
