Business Financial & Performance Management Series #5
“Are Sales and Accounting Aligned?”
Simple question, which of the following better describes your financial reporting:
“Sales are up 17% this year from prior and we are on track for future revenue growth”;
“Our Margin is up 4% over the prior 2 years and we are really focusing on maintaining this level”;
“Our sales are up 6% from prior coupled with an increase in margin by 1.5% resulting in an overall contribution increase of 10.5%”.
One of the above statements resonated with you and your operational reporting style, and the reasons for this are quite varied but generally are a result of management’s background (sales vs. numbers), past business practices and where your business is on its life cycle. Let’s look at each one:
In the first instance, the focus is clearly on a sales driven organization, and, realistically you need to sell product and services to generate cash flow and sustain growth. At a bare minimum inflation requires 2 to 3 percent growth just to keep up, and, with reduced barriers to entry in our global marketplace concentrating on sales and future growth opportunities is necessary. But at what cost?
The second statement is indicative of a company that has a clear handle on its operating environment and is focused on ensuring that there is no erosion to its margin. An eroding margin can quickly become a cash burn as the margin falls to a level which cannot sustain the appropriate working capital requirements of the business. Therefore, this attention to margin maintenance can help ensure that the revenue generated is adequate to maintain the appropriate level of cash flow. Or does it?
The final statement is demonstrative of a company that has recognized that maximizing its contribution and by extension its profitability requires collaboration between the sales and accounting departments. We have determined that sales are a necessity for any business, while we have also demonstrated that an appropriate handle on costing and operations is also imperative. A company may succeed by focusing on sales or costing, but the most successful businesses succeed because they recognize that you need to sell the appropriate products and services at the right price.
For a sales driven company, rapid increases in sales tend to lead to reduced margin (think of the volume discounts we all covet), along with increases in marketing, commissions and associated overhead, often leading to working capital deficiencies.
A number crunching company can become so focused on costs that it loses sight of maintaining relationships with customers, reduces investment in new product lines, and may allow competitors to enter who are willing to sell at lower margins to increase their own revenue.
A company that aligns both sales and financial objectives understands that although it must maintain and grow its customer base, this growth has to be at a level that ensures continued maintenance of the appropriate margin to provide adequate contribution (that is to say cash flow) to cover all the associated operating costs of this growth, while ensuring that there is an appropriate level of profitability at the end of the year.
Jim Melville, CPA, CA