Expenses rising faster than income, combined with increased revenue instability and uncertainty, are dual pressures making it harder for publicly funded and non-profit organizations to manage delivering against their missions and plan for the future.
The first step in addressing these related challenges is to analyze and understand at a more granular level both income and expense trends and projections. Only once this has been completed is it possible to identify options to mitigate, address, or eliminate the key issues identified.
After completing multiple similar client engagements for publicly funded and non-profit organizations, Core Catalysts has developed a rapid methodology that enables us to complete “Financial Futures” assessments that arm leaders with objective information that dissects expense and funding structures and key financial management processes to highlight the greatest risks to financial sustainability. From this, we also provide an action plan for leaders to balance budgets and position their organizations for future success.
In just four to six weeks, senior experts from Core Catalysts with specific experience and subject-matter-expertise, working directly with client finance, leadership, and operations teams, can deliver:
A Current Financial Health Assessment
Analysis of budget to actuals and implications for future surplus / deficit
Balance sheet evaluation to determine current “runway” and risk posture
Spend review and assessment of ability to support future objectives
Funding formulas and methodologies review to identify risks to long-term sustainability
Budget process and financial systems review
Financial Scenario Planning
Three to five-year financial forecasts, including projections with and without identified cost-saving opportunities, to illustrate their impact on surpluses, deficits and overarching financial position
Fund balance trend and vulnerability assessment
Sensitivity analyses
Action Plan for Sustainability
Prioritized list of cost-saving initiatives for further investigation, with initial (directionally accurate) quantified savings, feasibility, risks, and potential impacts to organizational stakeholders
Initial understanding of opportunities to increase revenue
High-level roadmap for executing cost-saving initiatives
At the conclusion of a Core Catalysts Financial Futures Assessment, organizational decision makers will have a clear picture of the current and future financial position, including budget accuracy and budget-to-actual reporting, forecasted financials, and a roadmap to a balanced budget through potential cost-saving initiatives. Clients can also be led through a prioritization process that engages leadership in defining what can be tackled first, second and third given other pressing priorities in the organization.
If you would like to find out more about our rapid Financial Futures Assessment for publicly funded and non-profit organizations, reach out to us today!
After a prolonged period of higher than historical average inflation, including large increases in many “core” input costs, you might reasonably think that most companies would now have a better understanding of their cost structures, track and monitor changes more closely, and know what to do with regards to pricing (in order to protect revenue and profitability) when they experience new and additional cost changes.
But based on many recent experiences with small ($1M to $100M) to medium (>$100M to $1bM) sized businesses, which make up a sizable part of the US economy, if you thought this, you’d unfortunately be wrong.
Working with clients of this size over the last few years, we’ve seen some reoccurring issues:
Insufficient data and subpar financial and business reporting, hampering correct and timely decision-making.
Not increasing prices enough to sufficiently cover the impact of cost increases on their bottom lines.
Raising prices in ways that hurt versus help long-term revenue and profitability.
Pricing is Simple, Right?
Rising costs? Raise prices.
Cut costs. Capture value.
Train and reward the sales team for adopting the right behaviors.
We know these tactics work in concept, but in reality, it is never that black and white, and making the right decisions takes time and a lot of effort.
Wouldn’t it be nice to have a “pricing playbook” that provides clear direction on how to adjust pricing quickly, and in ways that truly address underlying challenges and revenue and profitability goals while reducing some of the work?
This playbook would provide step-by-step guidelines to address key profitability challenges based on the scenario at hand so that you could navigate changes and complexity strategically, confidently, and backed by data.
Based on recent work we’ve done for some of our clients, developing such a playbook is possible, and not as hard as it sounds.
Developing Your Own Pricing Playbook
To get you started on your pricing playbook journey, we’ve compiled a handful of practices that will help your pricing decision making, based on changes to your costs, that support revenue and profit margin growth when rising expenses and volatile markets are at play.
Practice 1 | Understanding Price Increase Economics
Common mistakes when implementing a price increase include:
Not understanding the economics of a cost increase
Progress vs. perfection
Failure to make a timely call
Communication vs. negotiation
Lack of preparation
Not being resolute
Not tracking price execution and realization
There is a lot of complexity that goes into executing any price change, from organizing and aligning your sales team through to managing customer expectations and ensuring that your actions will deliver the desired results, with minimal unintended consequences.
This all starts with understanding the economics of cost increases and how the results of proposed price increases will translate directly to the bottom line to ensure profit margins stay on track.
Consider the table below, which illustrates a scenario where costs go up 5%:
Base Case
Scenario:
Costs Go Up 5%
Pass Through:
“Simple” $
Pass Through:
Same %’age
Revenue
$500
$500
$513
$525
Cost
$250
$263
$263
$263
Gross Margin
$250
$238
$250
$263
Margin %
50.0%
47.5%
48.8%
50.0%
BPS Impact
.
(250 bps)
(122 bps)
0 bps
While many companies aim to “pass through” the dollar impact of a cost increase via pricing increases (in this scenario, $13) in order to maintain total gross margin dollars at $350, the net effect of the “simple” pass through is a decline in margin percentage of 122 basis points.
However, only when the pricing pass through is at the same percentage as the cost increase, is margin maintained at 50%.
This may sound simple, but a surprising number of businesses do not look at cost pass-throughs in this way, thereby damaging gross margins in the process.
Is this what you are currently doing?
Practice 2 | Optimizing Price Increase Strategies
Not all cost increase factors are made equal, and yet many organizations adopt a default strategy or typical approach no matter what the cost increase driver is, when alternative strategies and approaches might be better.
Consider the table below, which outlines different cost increase factors, and “typical” versus alternative approaches to resulting price increases:
APPROACHES
COST FACTORS
TYPICAL
BETTER
BEST
Raw Materials
Historical Averages
Replacement Cost
Replacement +
Indices View
Labor Rates
Historical Averages
Based on New Rates
Based on Projected Wages
Freight Expenses
Use Estimates
Use Actuals
(Spot Rate)
Use Actuals and Pass- through Margin
Capacity Utilization
Not Considered
Price Adjusted based on Capacity
Capacity Factored into Pricing
Time Estimates
Estimated
Estimated, with Contingencies
Track Actual vs. Plan
Supplier Increases
Pass through $’s with 30-day notice
Pass through % and immediate (contract)
Immediate Pass through % + markup
Does your organization tend towards a typical approach, or do you consider alternative strategies?
Practice 3 | Addressing Backlog and Customer Portfolio “Role” and Profitability
If your company is experiencing a backlog of customer orders due to an increase in demand and / or a decrease in supply or resources, there are a few actions you can take now to help mitigate capacity constraints.
Likewise, when is the last time you assessed the “role” of each of your customers in your portfolio to understand (a) their profitability and (b) their impact on your resource utilization, cost structure, and operations?
Consider developing a customer “role” scorecard for the majority of your current portfolio (we recommend an “80 / 20” approach), similar to the example below:
CUSTOMER = ABC Inc.
LOW
NEUTRAL
HIGH
Revenue
X
Potential Spend
X
Profit Margin
X
Relative Profitability
X
Share of Business
X
Tenure of Relationship
X
Ordering Behavior
X
Competitive Alternatives
X
Impact on Cost Structure
X
Undertaking this exercise may well deliver some very interesting and powerful insights on which customers to focus on for growth, what role each customer has within your business (i.e., their impacts on revenue and profitability), and where sales, marketing, and operational time and effort may best be invested.
Likewise, from a pricing perspective, this exercise will likely show that you do not necessarily need to increase pricing across the board and indicate how you could be strategic with prices increases, by product / service offering and customer, to drive better overall revenue, profitability, and customer “mix.”
Do you do this type of exercise on a regular basis?
Execution is Key
You can have the best strategy in the world, but execution is where the money lives.
Unfortunately, we’ve seen too many companies attempt to increase prices, yet suffer unintended consequences, including achieving zero net benefit to their top or bottom lines, and negatively impacting long-term relationships with key customers.
To counteract this, as well as helping them develop data driven rationales, backed up with supporting tools, we’ve worked with clients to empower their teams, communicate, engage, and establish buy-in and understanding (both internally, and with customers), and to measure activity to ensure the desired outcomes are achieved.
Conclusions
If you aren’t sure about the best route for managing pricing within your business, contact Core Catalysts to quickly assess where you might be losing money or missing opportunities, and then help you identify the best paths forward to manage and even increase your revenue and profit margins.
