Many businesses are still suffering from the crisis of confidence arising from the worst trading conditions for more than half a century, resulting from the “credit crunch” in 2008 followed by the “Euro crisis” in 2011.

This confidence ultimately manifests itself as a lack of sales within businesses, which causes greater impact on low margin businesses.

The internet too is having a greater impact on companies’ ability to control margins. In a highly competitive environment, finding, winning and retaining new business can be very costly. Armed with internet resources such as price comparison sites and downloadable applications, consumers and business customers can switch between suppliers easily. In addition, a competitive edge gained through product innovation, that might have guaranteed suppliers a price advantage, can often be shortlived as the rapid flow of information enables products and designs to be replicated much faster. Counterfeiting and theft of intellectual property, ranging from high fashion designs to the latest music, has added to the erosion of margins in creative industries.

Other things that can cause margin pressure include:

1. When a new competitor enters the business and increases its product offering or lowers its costs

2. When commodity costs rise or other costs within the supply chain are rising

3. When increased regulatory controls are imposed on the company or industry

4. When new legislation is introduced that fundamentally changes the markets in which the company competes

5. When rising selling, general and administrative expense costs occur without a proportional rise in revenue

The combined effect of these factors, apart from reducing profitability can restrict expansion and growth, R & D, employee rewards and in the worst cases livelihood.

It is difficult to prevent items 1-5 arising, but some control can be gained on the last item. This area is of great importance for low margin businesses, since the amount of reduction in the level of profitability is proportionally affected by the size of the increase in costs. Any activity to reduce the cost base helps to reduce the impact of a reduction in turnover due to factors beyond a company’s control, and the lower the margin the company enjoys, the greater the effect as can be seen in the graph below.

Inevitably, in such circumstances, internal resources, with the available time and requisite expertise to embark on a cost reduction exercise, cannot be found, which is why many of our Clients engage us.