Many participants in the insurance space tend to focus on the top line. Where are sales heading? What is happening to premium levels? How about my commission? Often, this focus can be to the detriment of the bottom line result.
There are many businesses over the years where companies, such as General Electric, have focused on growing the top line through price increases and acquisition, but failed to pay enough attention to the bottom line impact and how costs can drag you down. You think you are growing the business, only to find that your profits and your margins are shrinking.
Often the most profitable companies are small, nimble owner-operated businesses that focus closely on expenses and the bottom line alongside business development. We all know a frugal operator that has watched the pennies to find that when they go to sell their business, they achieve an outstanding result because business valuations tend to focus on the bottom line, not the top line.
So, why focus on the bottom line? Here are a few points to keep in mind…..
Saving a Dollar
Depending on your business model and its inherent margins, an additional $1 of revenue could drive an additional 15-20 cents of profit to the bottom line. High margin businesses will mean more for the bottom line.
Saving a dollar of expense however, means an additional $1 of profit. It goes straight to the bottom line, so 100% of any cost saving initiative will have an immediate and, provided the expense was through inefficiencies, an enduring benefit for the business. Permanent cost savings will keep adding to the business bottom line.
CAPEX vs OPEX
When managing expenses, its important to differentiate between capital expenditure (CAPEX) and operating expenses (OPEX). OPEX savings will give you that bottom line impact immediately.
CAPEX on the other hand involves committing capital to invest in longer term improvements in your business. For example, a new broking or underwriting platform. The initial set up, development and transition costs are generally able to be capitalised, and written off over a period of time, depending on your tax and accounting advice. However, the business case to make these investments should determine what ongoing cost savings the investment can produce as part of the evaluation process. If the business case suggests headcount savings, you should ask for the names of the people you will no longer need. Many Tech investment business cases include project cost/headcount savings that never eventuate – so consider asking for the names/job roles planned for the headcount savings and see if this is ever achieved.
Impact on Business Valuation
The true benefit of a bottom line/cost focus comes when you are looking at selling or valuing a business.
If we take a $1 increase in revenue, with a business that operates on a 20% profit margin, then the impact of that increase in revenue on the value of your business could be between $1.60 and $2.00 - this assuming a business valuation earnings multiple of 8-10 times.
However, $1 saved in expenses could mean your business is worth $8-10 more. There is a big difference between $2 and $10! Taking this into account, your business could literally be worth millions more if you focus on the bottom line whilst you are growing it.
How Best to Achieve Cost Savings?
In the current environment, the best way to create cost savings is to invest in labour saving technologies and platforms. The cost of staff is steep, and rising, and often not very efficient. Automate and eliminate, rather than cutting costs in client service or business development activities.
And, when it comes to that technology business case, have it done by people who understand the genuine savings the solution can achieve, backed up by previous implementation data to justify the up-front capital cost involved!