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:
That you can sell your product or service profitably, and..
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:
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article personally with me, please write to
me at alex@goldminetactics.com
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