Over the last decade, businesses have been transformed by three key factors: the rise of new technologies, the emergence of innovative business models resulting from digital tools, and the influence of a globalised economy.
While these changes are potentially exciting, they can also put pressure on margins for many mid-market businesses.
But CFOs who embrace new ways of doing business and everything the digital economy has to offer may find they are able to help drive margins in their companies.
Nick Hill from Walker Hill Chartered Accountants says that margins are falling across his client base.
He says that is due to rising costs to deliver services and products which is also coupled with client demand for lower prices.
More competition across all markets and shifting barriers to entry in some industries are also putting pressure on profits, Hill explains.
Hill suggests a range of strategies businesses can consider to address this.
These include shopping around for more competitive manufacturers, improving processes, and restructuring services and products to provide more value while minimising costs.
Constant vigilance is important, he adds.
“Continually test alternative forecasts to improve margins," he advises. “Proactive reviews will help maintain margins."
Revisiting the business model for current market conditions
For many firms, the profit outlook is likely to depend on the sector in which the business operates, as well as the firm's ability to adapt to a digitised world.
“In Australia, a number of sectors continue to struggle, for example, manufacturing and retail. But margins are improving in businesses that are prepared to reinvent themselves," says Michael Dundas, who heads Private Clients services for Pitcher Partners.
“Firms that are not sitting back and waiting for the economy to shift but have identified market demand or market sentiment, and have then structured their product offering to take advantage of this – they are the winners in this environment," he says.
“They are not waiting for consumer sentiment to shift, they are going after opportunities," he explains.
Dundas says companies that rely on a ten-year-old business model risk stagnating, particularly if they then hope that an improving economy will bring them business success with an old product offering.
He says it will take a determined effort from the leadership team to convey change to a business in this position.
Investing in mature technology
Many businesses have also been able to improve their margins by taking advantage of recent maturation of technology, he says.
“Ten years ago, clients had a-hit-and-miss experience with technology offerings," Dundas says.
“They promised the world, but ended up being problematic or had integration issues. But in the last three or four years the quality of the technology solutions has gone to another level, and they do make a genuine difference."
“So, you see a big difference between businesses that aren't spending any money and are hanging onto their margins for dear life, compared to businesses that are willing to invest in technology solutions or market reviews to stay ahead of the pack. Those businesses tend to get a return on the investment."
Nevertheless, Dundas says, many firms are still reluctant to make that jump and invest in new technology.
“The financial crisis went for so long people got very used to operating their business on a low cost, taking the 'squeeze the juice out of the fruit' approach," he reflects.
“It does take quite a different business mentality to reverse that trend, and spend money to make money. Nobody did that through the financial crisis; everyone just battened down the hatches."
He says the businesses that are willing to invest are the ones that have seen margin improvements.
“The ones that are still in that squeeze-the-cost-base model are the ones that are finding it more of a grind."
Develop a smart strategy to address rising staff costs
Staffing is one business cost that can have a huge impact on profitability.
In recent years, wages have stagnated. The question is whether this trend is over and business and finance chiefs can expect wages to rise.
In the twelve months to November 2017, wages in Australia grew 2.2 per cent, well below the long-term average annual growth of 3.3 per cent.
Then, in the December 2017 quarter, wages grew by 2 per cent, the first time this measure has risen substantially since 2015.
“Access to skills in most industries is still highly competitive because the availability of labour is very tight," Dundas says.
However, he says, businesses that believe that wages are the sole differentiator of their recruiting and retaining power may find they will struggle.
That's because in a competitive labour environment where rates of pay are rising, it's important for businesses to be able to differentiate their offering to staff. This can help reduce pressure on rising wage costs.
“Businesses tell me even top talent require investment in training and development within the organisation to be able to perform these roles," he says.
“This leads to much higher turnover costs because training and induction costs are so high."
There are a number of ways to avoid this, says Dundas. One way is to develop a talent retention scheme.
“The idea is to create a program that means that once you have secured good talent, middle-management roles are more tenured positions, rather than just being for two or three years."
He says this is not about offering staff flexibility in their roles. “Most businesses are on top of work/life balance," he says.
“It's more about creating an employment package that's appropriate for the individual so they are more committed to the business."
CFOs of businesses that adopt such a strategy, may find that they have an opportunity to reduce their staff costs and keep their best people - a double win for the company.
CFOs may find some advantages for their business by taking on this three-fold strategy.
By examining whether their business model is suitable for the current era, investing in technology to increase efficiencies and put together talent packages that encourage people to stay with the company, CFOs may be able to help their firm into a strong position to manage their margins this year.
Key Takeaways
- Revisiting your business model can ensure it is fit-for-purpose in the current business climate.
- Exploring ways that technology can make your operations more efficient may help drive margins.
- Good staff require appropriate pay – but businesses can keep a lid on wages by investigating staff retention schemes.