Diversifying revenue streams: The finance director’s role
The retail industry has been in the news and under scrutiny in recent times, with a number of profit warnings and high street closings being witnessed.
As the consistent growth in online shopping shapes the future of the retail sector and the ever-increasing customer expectations further narrow down profit margins, enhancing retail business income is now more important than ever.
Diversification of revenue streams is one important aspect of boosting income and making sure that your bottom line does not feel the shocks of any future upheavals in the marketplace and business environment. The role of finance directors (FDs) becomes an important one in this regard. We will discuss that a little later in this article. First, let’s take a look at how revenue streams can be successfully diversified.
Diversification of revenue streams
The idea is to have secondary revenue streams that can augment a business’s income together with the primary revenue stream. Also called “ancillary revenue streams,” they have been very successful in the airline industry. According to one estimate, the total ancillary revenue of the global airline industry stands at around 34 billion pounds.
It is clear that ancillary revenue has had a huge impact on the industry. In 2018, British airline EasyJet reported its highest number ever for ancillary revenue while Irish airline Ryanair now accounts for 28% of its total revenue from ancillary sources.
The retail industry is slowly starting to adopt this lucrative area. Diversification of revenue streams in the retail industry is a sure-shot way to enhance profits and increase turnover in a tough environment. Recent research has revealed that 46% of all retailers now make a tenth of all their earnings from ancillary revenue sources. Amongst businesses having a turnover of more than 100K, 4 out of every 10 retailers say that secondary revenue sources are vital to the survival and success of their business.
There are a number of ways through which retailers can generate secondary revenue. These include things like selling advertising space on their own websites, providing membership to loyalty programs run by a third party, etc.
A good example is Amazon which makes billions annually from ad revenue. This comes mainly from companies that want to sell their products on the giant e-commerce platform.
Amazon’s advertising works in a similar way to supermarkets that tend to charge suppliers for prominently displaying their products in the store. The popular e-commerce platform earns lots of secondary revenue by charging users for displaying their products on the first couple of search pages.
Retailers that have effective secondary revenue strategies in place have been quite successful. Almost three quarters of all retailers that make up the sector have experienced enhanced profit margins during the last 2 years.
The finance director’s role
There is often a question of ownership and responsibility when it comes to secondary revenue streams.
They give the best results when there is support across the entire business. Instead of the responsibility for additional revenue generation falling on commercial, marketing or sales department, there should be complete backing from all departments/divisions, and FDs have a key role in this to get everyone on the same page.
FDs and CFOs having a forward-thinking approach will be looking at how profit margins can be insulated against future uncertainties so that challenges can be overcome and sustainable growth achieved.
With secondary revenue taking on a key role in meeting financial targets, FDs are in a unique position where they can initiate meaningful dialogue with other divisions within their organisations and devise a comprehensive ancillary revenue strategy.
Secondary revenue is now an economic and financial need
As time goes by, secondary revenue will become even more important for the survival of retail businesses in today’s world. They play a major role in enhancing profits and improving the overall financial picture of a company.
In order to survive in the cutthroat business world of today, you have to innovate and go beyond traditional ways of doing things. It is vital that a dedicated and focused strategy exists that will align the company’s objectives and also encourage the reporting of additional income on the prepared financial statements.
Many businesses are getting good return from secondary revenue and smart FDs will be ardently advocating its adoption to secure the financial future of their companies.
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Date Posted: July 24th 2019
Posted By: Phil Scott