3 Keys to Accelerating Growth with High-Quality Revenue
When your company has been enjoying a growth period, everything feels right with the world. Revenue is streaming in, cash is plentiful, and every opportunity seems successful. But what happens when the economy takes a downturn like the one we’re experiencing right now?
When the economy slows and inflation is on the rise, there isn’t as much margin for error. It’s tempting in these circumstances to say yes to every opportunity that comes along because we don’t want to see a slowdown in growth. The problem is that growth doesn’t work that way. If you don’t know where your high-quality revenue is coming from, you’ll waste all kinds of valuable time and resources that will detract from growth.
Think of your business like a garden. In the spring, lots of things start popping up out of the ground and it’s exciting to see new growth everywhere. But you want tomatoes growing in your garden, not dandelions. And that means you’re going to have to put in some effort to plant the right seeds, water them, and keep out the weeds.
Plant the Right Seeds: Know Your Profitability by Segment
High-quality revenue is a critical success factor in any M&A deal, especially when the economy is slow. Investors need to know that you have a stable, recurring revenue that will continue to generate profit even when conditions aren’t ideal.
When you’re in a growth period, it’s easy to say yes to every revenue opportunity, because all revenue feels like good revenue. That’s almost always a mistake, however, because when your revenue isn’t growing as much, there isn’t as much margin for error. It’s much more important to say yes only when opportunities align with your revenue strategy, and no to everything else that isn’t in your niche.
So how do you determine which market segments to pursue? You need to know revenue and profitability by every segment. This takes you a step beyond basic financial statements to help you understand profitability from multiple angles.
- Trace Revenue to Meaningful Segments – Segment your revenue by the dimensions that are most meaningful, such as lines of business, market segments, regions, or types of products and services. Get team members from sales, finance, and marketing involved so you can be sure you have identified all segments.
- Map Costs for Each Segment – In addition to direct costs involved with developing the product or service, look at associated costs such as marketing, customer service, supply chain, and returns. Identify the gross profit at the customer level and at the segment level and attribute costs so you can determine which segments are the most profitable.
- Follow the Data – Don’t rely on your gut to determine which segments are the most profitable. You may think a particular segment is your core revenue, but it may actually be costing you more than you think. To get a true picture of profitability, you need good data that shows you the numbers for individual revenue segments, including:
- Gross margin by segment
- Percent of overall revenue
- Revenue trend lines (growing, flat, or declining)
Water Your Seeds: Align Business Around the Right Revenue
Once you have identified your high-quality revenue segments, the next step is to align your organization around the areas where you want to grow. This will affect every part of the organization including sales and marketing strategies, lead generation, hiring efforts, and M&A outcomes. Here’s how to do it:
- Refine Reporting Processes
Start by ensuring that you have adequate systems, processes, and tools to gather and analyze data. Profitable companies build their strategies on good quality data, and that means ensuring that you can find the numbers you need quickly so you can make informed decisions.
- Design Strategies to Attract Quality Revenue
Align your revenue growth strategy throughout the organization and work to attract the most profitable revenue based on the data. For example:
- Align Marketing Efforts – Focus your lead generation and marketing efforts on the most profitable revenue segments based on data. Use these efforts to reinforce the direction you want to move with your growth strategy.
- Incentivize Your Sales Team – Implement a sales compensation program and align your compensation structure with where you want the firm to grow.
- Rethink Pricing Structures – Knowing which revenue segments you want to pursue will give you insight into pricing strategy. If a non-ideal opportunity comes your way, you can increase your pricing and boost your margin to compensate for some of the waste.
- Align Hiring with Revenue Strategy – When you know what kind of revenue you want to pursue, you can target your hiring efforts to fill jobs in those business segments with top performers. Prioritize recruiting based on potential for revenue generation and growth opportunities. In addition, take a look at your recruiting tools and processes to ensure your recruiting dollars are making the most impact.
Don’t Water the Dandelions: Stay Disciplined with Your Strategy
The best way to do this is to stay laser-focused on data. Here are a few ways to do this:
- Optimize Systems and Processes – Integrate, automate, and standardize your financial systems and processes to capture data with precision and increase financial visibility.
- Upgrade Your ERP If Needed – If your current ERP can’t give you the level of sophistication you need, you’ll struggle with visibility and reporting. As your business grows in complexity, upgrade your ERP to gain greater flexibility, functionality, and scalability.
- Implement a 13-Week Cash Flow Strategy – A 13-week cash flow strategy is one of your most valuable tools for staying disciplined with cash. Looking 13 weeks ahead gives you the agility to make course corrections and maintain peace of mind in any market.
- Monitor Strategic KPIs – Track key metrics like bookings, gross margin, ARR, MRR, churn, and customer LTV to monitor whether you are building momentum in the right places.
When you focus on pursuing high quality revenue and staying disciplined with every business decision, your company will be healthier and more profitable overall. That’s what gives you the stability to continue growing even in an economic drought.
If you need help designing your revenue or growth strategy, CFO Alliance is your secret weapon! Contact us today to learn how we can help you streamline, optimize, and accelerate your growth.
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