The objectives of company owners and/or senior management drive their business strategy. This strategic approach is usually very clear at the outset, but can easily become blurred over time. For example, to grow the customer base, it can be tempting to attempt to win all tenders for new business, at any price. In some circumstances, particularly when entering new markets, it may be appropriate to agree to “loss leader” deals. Although not profitable individually, the intention is they generate other, more profitable, revenue streams. If these do not materialise, the business may well grow in size, but not profitably.
“Turnover is vanity, profit is sanity!”
Ultimately, in order to increase the bottom line, customer contracts must generate a healthy profit margin, after allocation of overheads. Overheads are the various costs incurred in running a business, not directly related to a particular product or service. These must be shared amongst the different products and services sold by the business. Without an appropriate overhead allocation method, it can be difficult to determine whether a particular new customer proposal is worthwhile, or at what price to pitch.
Commercial Appraisal & Profitability Analysis
Marches Business Consulting can perform a commercial appraisal of a new contract, to determine whether or not it is a viable proposition. We can also review the profitability of existing contracts and pricing structures. Or we can assist with pricing strategy, by allocating overheads appropriately and using financial models. These need not be restricted to customer relationships. Such techniques can equally be applied to supplier contracts as well as internal arrangements, for example staff bonus and commission schemes.