When emerging mid-market companies need to raise growth capital, attract an M&A or private equity deal; their current cash flow will be closely scrutinized as an indicator of their potential to generate future returns. At this critical point in their evolution, many companies scramble to make improvements to their gross margin percentage. They see even small improvements in gross margin as a step toward impressing investors or acquirers as to their potential to build leverage and generate future profits.
Common Business Strategy Mistakes When Bolstering Leverage
To achieve near term improvements in their gross margin, the first recourse of many CEO’s and their boards is to try to squeeze operating expenses, especially cost of sales. A whole industry of consultants has emerged to help companies look more transaction-ready by shaving expenses, notably those that are part of cost of sales. One such approach is contracting to outsource services. This is structuring the outsourcing deal with the service provider so that costs are minimized in the early years of the contract. The major issue with this approach is that potential transaction partners may see such a step as an unsustainable gimmick.
In fact, it often makes more sense for companies preparing for a transaction to start by examining the top of your P&L. In my experience as an operating executive and advisor, I have seen many companies fail to plug obvious leaks in their revenue stream. They somehow miss the fact that to your audience of potential transaction partners, even modest revenue gains can be a far more persuasive indicator of your company’s future value than reductions in the expense part of the P&L.
Left unattended, revenue “leaks” can accumulate, reducing your profitability and your entire value proposition. For the sake of being transaction-ready and attaining an attractive valuation, you must be able to identify threats to your revenue stream—and short term approaches to fixing them.
Indications of a Leaky Revenue Stream
Some causes of revenue shortfall, such as poor market and product positioning, can be deep seated and take time to address, while others can be addressed in the relatively near turn. Several causes include:
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A surge in customer complaints
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High customer churn
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Lack of significant new customers
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Lack of cross selling and up selling
If any of the above points describe your company, you may have a revenue leak. Fortunately, there are actions to remedy such leaks. They are:
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Putting renewed focus on customer service; tracking, fixing and closing out complaints.
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Bringing in business development specialists who can open doors for you at a higher level of clients and prospects than you are selling to now.
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Hiring talented sales personnel and investing in training them.
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Marketing to new, strategic customers.
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Equipping the sales force to cross sell and upsell.
Done right, these steps can have a near-term, positive impact on revenue.
Components of a Successful Revenue Generation Culture
The following model is the result of many years of advising CEOs and Boards on revenue generation issues across scores of industries – regardless of the product / service. It illustrates the building blocks that must be present for an effective sales culture to thrive. Specifics may vary by industry, but some form of these components must be present.
In the next article in this series, I will describe how to review each of these components of your sales process and culture—to plug revenue leaks, boost your top line and get yourself into the best possible state of transaction readiness.
About the Author
Sam is a seasoned executive with a proven record of developing and implementing strategies to enhance revenues and profits across a variety of industries. He has designed and implemented supply chain and revenue growth plans for clients in industries as diverse as office products, aerospace, banking and non-profits. Contact or learn more about Sam.
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