Case Study: Understanding Operating Leverage
As part of our SMB[Build] advisory work, we provide strategic finance (FP&A) support to owners to better enable their multi-year plan. Over the last three months, we have worked with a seven-person team to transform how they think about their clients and where to reinvest. We believe that the foundation of any good business is understanding Operating Leverage: what is the (1) investment cost, (2) contribution margin, and (3) net payment cycles on every client, segment, and business line.
At this seven-person company doing seven figures in revenue, we did the following:
(1) Financial Assessment - We analyzed contribution margin for each client—revealing which clients were most profitable. Then we developed a payback curve for each segment—how much was invested to acquire and onboard—and how long was payback.
(2) Ideal Client Engagement - We then assessed the sequencing of their services over the first 12 months with each client/segment. They have three service offerings and the financial analysis showed the weighting of their services throughout the lifecycle of their client projects, what service was most profitable—and what that would mean for future revenue curves. For example, the analysis showed that (a) their service mix was too concentrated and (b) there was an opportunity to sell one of their service lines earlier (month 2 or 3) to increase and diversify revenue.
(3) Next Steps to Optimize Current Clients - This became a great foundation for how to think about current investments, how to strategically plan around what services to weigh their business in the upcoming year, and set investment and % contribution margin targets. This will impact how they quote, budget, and manage every project they have throughout the year.
Testimonial: As the CEO of this company said about our help to them: “SMB Ops is a force of nature and have help us understand our business at its core. Not only have they made us smarter, but they have forced each of our people to get smarter within the processes that we control.”
Our Observations: Terminology and consolidated information is powerful. For this client, we have started to define terms (like contribution margin) that will transform their weekly and quarterly operations. And we will continue to share the insights on how those numbers/performance change, why, and what to do when financial triggers/signals are hit.
