For Small Business Owners & the Self-Employed

Insider Secret:

More Sales vs. More Profits

More sales does not always equal more profits.  Which method of growth are you focused on?

by Alex Goumakos, CPA

One of the all-time classic examples of business "strikeouts" is the belief that explosive sales growth equals economic prosperity.  If you subscribe to this view, chances are there's a lot more you can do to increase the profitability of your business.

First, let's get one thing perfectly clear: More sales doesn't always equal more profit. Unless your overall company operations are profitable, then no amount of new sales will dig you out of a financial hole. Business growth is driven primarily by company profits, not sales. In order to maximize profits, you must focus on all factors and not just sales. Ignoring things such as costs, expenses, productivity, capacity and quality is simply asking for trouble.

Case in point. A small construction company I once knew was very good at generating new business. In a relatively short time span, they managed to generate an incredible amount of "paper" revenues. But despite the spike in sales, they could hardly pay their bills. Since they only collected a small portion of the total contract amount up front, they were constantly strapped for cash.  Because of this and some financial mismanagement, the company didn't have the money to purchase materials. They frantically scurried to finish certain jobs in order to collect their profits so they could turn around buy the materials for other jobs. It was a vicious cycle indeed. Add to all of this the huge backlog and some shoddy workmanship and you can understand why this company had disappearing profits even with high sales numbers.

Another way you can strike out with a "more sales" mentality is to sacrifice profit for volume.  If your goods aren't sold at the right price or if your costs are too high, you may be working much harder than you have to just to survive. While gross margin (revenues less direct costs) is important, what matters more is net income (revenues less all costs and expenses).

Never focus on volume unless you first focus on cost control.

I can't count the number of small business people I've met who relied on sales volume as a cure for a stagnant business.  While more sales will definitely stimulate activity, you'd better make sure that the activity is profitable.   

You should commit to increasing sales volume only AFTER you've determined:

1. That you can sell your product or service profitably, and..
2. You're prepared to handle the volume.

The best way to grow your business is to focus on long-term profitability: ie, more profits over more sales.  I'm not saying that you shouldn't try to increase your sales.  You absolutely should.  Just make sure that you're able to sell your product or service at a rate that maximizes profit, not volume.

Long-term profitability is achieved by committing to a regular plan of:

• Knowing how to set the correct price for your product or service

• Engaging in a furious cost-cutting campaign

• Improving your production or administrative efficiency 

• Tapping a new profitable market

• Developing a new profitable product or service

• Buying or merging with another profitable business.

Keep in mind that more sales doesn't always mean more profits.  If you're looking to grow your business, focus on generating more profit, and not only more sales.  As the saying goes, "It's not what you make, it's what you KEEP, that counts."

For information on how you can generate more profits and build the business you've always wanted, take a look at this guide I developed: