Why Pruning Your Business Could Create a Path for New Growth?

It seems counterintuitive to cut off branches, leaves, or even roots to get larger, fuller plants. And yet, it’s one of the most important tasks for a thriving, healthy garden.  Just like a garden, a healthy and thriving business requires an Owner who can tend to the health of their business by pruning or removing things that are inhibiting growth. As a business leader, the intuitive way to grow an organization may be to add locations, offer new products, hire new employees, sign on more vendors, and acquire other organizations. As a result, the revenue may increase, but the expenses can out-pace the revenue. After investing time, resources, and money with opposing results, could there be a better way to grow the business by pruning it? If you’re not sure if it makes sense to cut off what may seem like perfectly healthy areas of your business, or you are uncertain which areas to prune to promote growth, you’re not alone. Sometimes a resistance to ending and pruning things in our company can lead to a constant status quo. Consider these core areas of your business and if it’s time to do some healthy pruning.

Products and Services
Product profitability is not the only criteria to consider when deciding to keep or drop it. How the product contributes to your growth strategy, brand management and production efforts are also factors to help determine whether you should discontinue it.  Products and business lines (even when profitable) can compete for a company’s resources and minimize full potential. Take the time to evaluate all your products and services.  Analyze which products require the most resources. Determine which product lines are unprofitable and underperforming and which produce low margins. Reexamine your overhead and production costs as they relate to those items. You might learn low-margin products are not profitable once the overhead is considered. Even if a product is profitable, it might prevent you from making more money by producing and selling other items. In some cases, decreasing production of one item, rather than eliminating it completely, might be better for your product mix. As you enter a new year in your business, take the time to analyze each product and service your company offers in terms of how much it costs to produce, sell, market, and deliver. What are your gross margins? If you sell physical products, gross margin allows you to focus on your product profitability. A strategic financial advisor can help you analyze other aspects such as your gross profits, operating profit, and net profit. Evaluating product profitability is a valuable tool for managing your product portfolio. In every case, you need to be equipped with the facts to understand why a product is unprofitable and the value it provides to the overall company.

Customers
Many organizations find the 80/20 rule to be a reality of their operations: Eighty percent of revenue comes from 20 percent of customers. Do you know which customers are your most profitable?

You can apply the concept of pruning when assessing whether to continue a relationship with a specific customer. Retaining loyal customers is important, but you should focus on retaining the customers that are profitable and not draining. Are some customer profits increasing while others keep declining year-over-year? Which customers constantly demand custom products or services that require your team’s extra time that cannot be recaptured through pricing? Are some customers constantly late or even delinquent on paying invoices?  Just because a customer is filling your top revenue line doesn’t mean that they’re impacting your bottom line. It’s easy to get enticed by the big revenue figures and forget to do the analysis. Analyze customers in terms of driving both your top and bottom line (profit driven volume).

Quite simply, unprofitable customers consume more resources than they pay for. They divert attention from a company’s profitable customers, and they can create tension within the organization between those working to increase sales and those with more focus on the bottom line.1 Ending relationships with customers is difficult, but by pruning customers that have a negative impact on your company, you can use the renewed time and resources to focus on those customers that are increasingly profitable and are a source of referrals. If it’s time to prune a customer, the best course of action is to communicate a price increase or renegotiate the value proposition, and potentially, in a professional manner, migrate them to other providers.

Employees
You might have hired someone who aced their interview, but as they begin working for you, you notice their behavior negatively affects the rest of your team. A company, after all, is only as strong as its people. If there are employees that are underperforming or are negatively impacting the morale and culture of the company, even if they are a top performer, it may be time to prune the relationship. Culture has a dominating effect on workplace effectiveness and productivity. Workplace culture surveys and performance reviews can help ensure your team members are contributing to the health and growth of your company. The findings can then be used to make improvements to the workplace or prune where necessary. Ending relationships is never easy, but if employees are preventing others from doing or succeeding at their jobs, contributing to turnover, unwilling to contribute to the overall mission of the team or organization, or exhibiting damaging behavior, it’s time to prune.

Processes
Sometimes processes intended to increase efficiency and quality can introduce unwieldy red tape into our organizations and produce the opposite of the intended effects. Fostering a continuous-improvement culture will help keep processes lean and efficient Many times companies have business process challenges that go undetected. Evidence of bottlenecks in existing processes include frequent delays, customer or vendor complaints, stakeholder confusion, and/or reduced productivity. Companies often utilize an extensive system of checks and balances to catch errors, yet
they still occur. Environments evolve and change without review and update of processes. Organizations overlook a cost-benefit analysis when implementing processes. If this is happening in your organization, it’s time to have an expert assess your business processes and systems.2 From production to inventory to lead time and quality, where can you prune in the process to create lean and high performing business processes?

Ready to Make Way for Real Growth?
What can be pruned in order to make way for strategic growth in your company? If you need a sounding board and strategic, financial recommendations to objectively help your company flourish,
B2B CFO® is here to assist. Our Partners provide decades of business and financial acumen and can help you step back from the company and identify where pruning needs to take place for long-term, profitable growth. Learn more, visit b2bcfo.com.

Sources:
1. Forbes- Your Unprofitable Customers are Killing You.
https://www.forbes.com/sites/lawrencesiff/2012/05/21/your-unprofitable-customers-are-killingyou/?sh=4af9f482388d
2. McKinsey.com
How to avoid losses and prune projects proactively – McKinsey
https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20
Corporate%20Finance/Our%20Insights/How%20to%20avoid%20losses%20and%20prune%20
projects%20proactively/How-to-avoid-losses-and-prune-projects-proactively-vF.pdf