Recovering From Bad Financial Decisions? Here’s How To Recoup >3% Profits In < 12 months

 

Did you know that bad pricing mistakes cost companies like yours on average 3 percent of profit each year?

 

Just think of it this way, a business like yours with teams managing millions of dollars of revenue make on average 2,000 – 3,000 pricing and commercial decisions a year. But, what if a certain percentage of these decisions lead to ongoing price mistakes?

 

In effect, every pricing mistake that goes unnoticed over the course of a year costs your business millions of pure profit dollars.

 

And the problem amplifies when the economy is in a downturn as we’re all going to realise soon: As a result of the COVID-19 crisis, for example, many businesses will be left with a product portfolio that’s massively depleted in value after months’ of excessive discounting, deep promotions, special prices and rebates. Others will be suffering from serious customer churn and brand image problems as customers switch to suppliers whom they believe won’t hike up prices as the economy worsens.

 

In this article, you’ll learn how to fix cash flow problems and prevent managers from making bad financial decisions.

recovering from bad financial decisions

 

Recovering from bad financial decisions and cash flow issues

 

The real problem with consistently bad financial decision making is cash flow. In simple terms, with every bad decision you make, you lose even more of your hard-earned revenue, volume and margin every single day – and often without even realising it.  Then you’re in the situation whereby profit and cash flow are at odds and you need to cut staff  and/or sell assets you may not want to sell. The reasons can always be seen on the balance sheet. Profits do not equal cash flow. 

 

It is vital to the organisation’s bottom line that CFOs ensure all pricing and financial decisions are financially sound.

 

Cash flow shapes up the ability of the company to pay its bills. The cash balance is the cash received minus the cash paid out during the time.  This is where things can get tricky with cash flow management.

 

What are some of the bad decisions business owners make because of cash flow problems?

 

In some cases, bad business decisions lead to cash flow problems.  Once you are in the crunch, your decision-making ability is further aggravated by a lack of resources and fear.  This can lead to bad decisions in three main areas of your business:

 

  • Pricing: You price your products too low; underselling you offer because you think this will sell more. Or increasing your prices way too much because you need to get money through the door. You then offer more and deeper discounts or specials to promote your products to customers in the hope that lower prices will push more volume. But this logic is not always the case, and margin on sell will be way below what you were targeting, causing ongoing cash-flow troubles.

 

  • Hiring/Firing: You decide to postpone hiring someone you need because cash is tight and the economy is down, but you have a steady demand for your products. You are struggling because you do not have the right staff to help you even meet current demand, which is impacting service, performance, quality, timing. You fear negative reviews and unsatisfied customers. 

 

Hesitating on firing a mediocre employee because the cost of searching, replacing, re-training, etc. can cause financial loss.

 

  • Spending: You don’t spend in places where you should spend because you feel like you can’t afford to. You don’t take advantage of opportunities or take educated risks for the benefit of your business because of the costs involved.

      

Decisions that most affect cash flow and recovering from bad financial decisions

 

Many businesses have cash flow problems because they’re not achieving their target margins. Not hitting the target margins will lead to delays in paying your staff’s salaries. This is a working capital requirement. You need working capital to pay payroll before you get your profits.

 

Pricing

 

The number one reason businesses fail is that they are pricing poorly.  Thus, how well you price your products/services and the margin it produces is the key to recovering from bad financial decisions.

 

You should redesign your pricing revenue model, as this will have the biggest impact on profits over anything else. Hence, consider the pricing model that fits best for your business: Value-Based Pricing, Fixed Fee, Time & Material, or Milestone Driven. 

 

Slipping through the cracks 

 

Cash flow can fall quickly if you’re underselling your offer. In effect, if you don’t have enough profit to generate the working capital needed to pay for supplies, payroll, and bills, for instance, trouble is not far off.

 

When you’re focused on getting the next tender or project and not looking further ahead, you’ll do anything to get cash in the door – but it’s often at lower margins which cause lower profits or even losing money on a job.

 

Hiring/Firing

 

Although hiring and firing are both difficult to do, it’s a vital operation. Having the right employees increases your profitability and makes your business a great place to work. Who you hire or fire in your business, therefore, is the second-most pivotal decision concerning cash flow. Essentially, you need talented employees who will fit the culture; and who are genuinely committed to working toward the success of your business.  If employees don’t fit, then you’ll have to take the proper steps and quickly. Staff who are not competent or happy in their jobs will inevitably;harm team morale and the long term success of your business.

 

Spending

 

When you are recovering from bad financial decisions you need to keep track of your spending. If you’re experiencing cash flow problems, Maslow’s Hierarchy of Needs comes into play, and you’re going to default back to what’s safe and secure for you as a business owner. Hence, 80% of businesses that fail do so because of cash flow, and a result of making spending decisions out of fear – usually meaning they don’t invest because they’re afraid to spend the money.

 

Short-term cash problems shouldn’t prevent you from making good long-term decisions.

 

Also, in terms of spending, you should always take educated risks. Therefore, by tracking valuable KPIs over the year; you can gather actionable financial intelligence that will help you quantify ROI and make good long-term decisions on spending.

 

Make the right decisions when recovering from bad financial decisions

 

CFOs seeking to better support their pricing managers should reassess the role of pricing in the business. Pricing managers need great stakeholder engagement skills to gain buy-in for decisions,; but they also need great analytical skills and pricing knowledge to know a good decision from a bad one. In effect, you need to develop more specialised positions focused on individual decision types to make better financial decisions.

 

Remember to look at the big picture when recovering from bad financial decisions

 

Before you think about reducing prices, think again. A sudden reaction to the recession is never good for business in the long run, and could even ruin your brand image. Instead, make your pricing decisions based on clear strategic goals and never lose sight of the following:

 

1. Volume

Too many firms fail to account for the effects of price on volume and of volume on costs. In a recession, trying to recover these costs through a price increase can be fatal. The wrong decision can seriously impact customer relationships, quickly turning your channel strategy into an area of substantial margin loss and risk.

 

2. Adjust your sales goals

Sales teams regularly experience “coffin corners of costing” during customer bid and tender processes. This means they overshoot figures on capacity utilisation and are too willing to give away margin by cutting prices of high-value products to win more deals. It takes a good pricing team to work out when the business should set dollar contribution goals for the right products and customers. Trying to win every single deal at lower margins to compete with ‘phantom bids’ that fall way below cost will only lead the company into a very uncomfortable financial situation. Your customers will also be concerned about your service standards slipping and consider a more expensive provider whom they believe will be a safer option.

 

3. Understand your competitive advantage

In a recession, pricing should be aligned to your industry position and long-term strategy. If your competitive advantage derives from a low-cost structure, cost-cutting can help to pump up your market share, positioning your firm for a payoff when the economy improves. But a common mistake is to use price as a competitive advantage for high-value products by giving away services or discounting to your best customers. In effect, this decision means you end up eroding the base of profitable customers and in turn, reduce the potential for profitability when the downturn ends.

 

4. Leverage your segmentation strategy

If you are a high fixed cost business, using b2b tiered pricing can help you to generate more revenue from your segmented customer base. Strive for “first-class,” “business-class,” and “economy” pricing, the way the airlines do. Such segmentation based on price sensitivity creates sales opportunities that can offset losses in other areas, especially since there is often little difference in production costs across the portfolio.

 

5. Pamper loyal customers

Losing a customer now represents a double whammy: It drains customer equity and raises the cost of acquiring a replacement. Keep your best customers coming back for more by bolstering compelling loyalty programs. Make it easy for them to buy from you. Offer subscriptions to new services; give them personalised bundled offers that they can’t resist. Breakaway from onerous contracts and give customers useful revenue models and payment terms that make it easier for them to buy from you.

 

6. Plug revenue leaks

Set minimum order quantities so that processing costs won’t eat all the profits. Strengthen your collection efforts to shrink the time between orders and receipt of payment. Without undermining customer value, establish a price menu for “free” services such as delivery or favourable payment terms. When sold separately, such offerings increase revenue opportunities. They also provide a benchmark value for customers who formerly discounted them because they were free.

 

7. Protect your brands

Brands become more valuable during a downturn because they offer defensible margins. Offer customers affordable luxuries or give them a psychological boost with the right promotion. Don’t cut prices on your premium brands during a recession because you assume this will drive volume. Find a market that wants what you have to sell and set the optimal price. Don’t rely on low prices and discounts to do the job for you. Instead, utilise word-of-mouth marketing and strategic channel promotions to give you the increased visibility and premium appeal you want.

 

 

 

 

 

Recovering from bad financial decisions: Implications 

 

Changing the traditional ‘management by committee’ model into a decision expert approach; enables finance to support more of the right decisions. A pricing team with the depth of expertise and a range of skills can provide you differentiated support; — ahead of the decision. They can enable a responsive, effective, scalable and widely applicable pricing approach; delivering, in turn, a financially sound decision without delay.

 

Conclusion

 

Think differently about how you are pricing – don’t just do the same old broken things. Think outside the box. Find unique ways to increase profit in a downturn.

 

Introduce new methods and technologies: Test new methods and approaches. Trial some b2b pricing examples like dynamic pricing – and implement better techniques and value-based pricing. Don’t persist with crude price rises across the; board to make money now this will only destroy the; value of your portfolio and customer relationship in the months to follow.

 

Find talents that can help you do pricing properly – don’t just rely on project teams that don’t have the required capabilities; – get help from experts or hire experts in their field to drive changes in your business.

 

Feel free to contact us and ask for resources that your team may need during this time.