How to maintain and grow profitability in a high borrowing cost environment

How to maintain and grow your organization’s profitability

Increasing your profitability is closely tied to improving resiliency by ensuring your business has the available funds to react quickly and adapt course in an uncertain marketplace.

While we have touched upon a few of the subjects below in our previous article, here we expand on them to give you a firm foundation to maintain and grow the profitability of your business:

Reduce wasteful expenditures

Identifying or reducing wasteful expenditures will help to increase the profitability of your business. Take a deeper look into your expenditures to identify areas where you can reduce costs without negatively impacting productivity or business operations. 

Consider exploring zero budgeting — or starting your budgeting base from zero and justifying every expense rather than basing it on the previous year’s budget. Zero budgeting often helps expose optional spending in your business and reveals areas where you may be able to improve profitability.

Additionally, you can consider cutting or reducing your production expenditures on products that do not meet the minimum cost of doing business. Review the product segments that your business operates in. Focus on the profitability of each segment and its value to your business — as well as the amount of debt that is needed to produce or deliver each segment.

If there are segments that have high costs of production and do not sell well — or have longer cash cycles — consider cutting or downsizing those segments to reduce your cost of production and debt servicing rather than continuing to produce it for minimal returns.

Lean into your supply chain

Economic challenges have shifted the supply chain from demand-constrained to supply-constrained due to declining volumes, freight bottlenecks, swinging market demand and other factors. Your supply chain may be experiencing many challenges — however, there are also opportunities to lean into your supply chain to improve the profitability of your business.

Start by auditing your supply chain to review your number of vendors, supply chain visibility, and geographic concentration. This can help reveal potential opportunities and risks — such as whether you get your materials from suppliers concentrated in one geographic area.

If your business uses multiple vendors, consider vendor consolidation to give you economies of scale — an opportunity to renegotiate for better terms or credit prices. Prioritize suppliers that don’t incur frequent significant price changes and who are willing to take more risk in holding inventory or modifying your minimum order quantity to help better manage your warehousing and cash flow.

Additionally, prioritize suppliers who can provide visibility on the availability of materials and are willing to partner with you to forecast availability for the products and services your business needs. That will enable you to schedule your production, procurement, and inventory levels accordingly and improve the profitability of your business.

Focus on the right customers

Review your customer base to identify those customers who bring the most value to your business. Prioritize customers who pay on time and are willing to pay premium prices for the service you provide by offering incentives such as fixed contracts to improve the quality of your gross profitability.

Additionally, ensure you focus on retaining customers who are willing to provide visibility so that your business can hold the right stock levels in your inventory, reducing the risk of excessive stock. Such customers may also be willing to share their market trend forecasting to help you predict shifts in demand.

It is important to keep in mind that customers may adjust their buying behaviour to adapt to the changing marketplace. At times, the market for certain products or materials may become inelastic — where customers may no longer be willing to absorb increased costs and will instead substitute your products for other lower-priced products.

Monitor current trends to anticipate when the market for your products or materials may become inelastic. Communicate with your customers to determine the impact of rising costs and how you may adjust your buying behaviour to preserve your business’ profitability.

Control your cash flow

Evaluate your operating cash flow to better understand the position of cash in your business. You must focus on having a positive cash flow from month to month to lower your reliance on debt to run operations.

A key step is to review your working capital needs. First, focus on ensuring all invoices are collected on time to manage your credit exposure with customers — therefore limiting credit risk. Businesses often rely on financing due to a lack of cash inflow when invoices are overdue. Ensure you follow up with your customers in a timely manner to collect any payments owed to redirect cash from your aging accounts receivable into your business. 

Next, manage your cash outflow to reduce dependence on debt to meet your supplier payments. Ensure you pay your suppliers on the due date or renegotiate credit terms — paying earlier reduces the amount of cash available to cover your fixed expenses.

Finally, reduce your inventory age. Complete an ABC analysis to identify inventories that do not generate enough cash flow or profitability — acting as cash holds in your cash cycle. Reducing your slow-moving inventory and inventory with low profitability can significantly improve the cash cycle in your business.

Controlling your cash flow will enable you to hold more cash, ensure you are cash positive each month, and increase the overall profitability of your business.

Take the next steps toward success

While the current economic landscape poses many challenges for business owners, you can increase the profitability of your business by identifying and reducing wasteful expenditures, leaning into your supply chain, focusing on your most profitable customers, and controlling your cash flow. These four steps can help you improve the profitability of your business, pay down your debt, and remain competitive in a high borrowing cost environment.

Contact us

To learn more, contact: 

Nakul Gupta, Senior Manager, Consulting - Performance Improvement & Operational Excellence
[email protected]
416.596.1711