If increasing gross revenue is resulting in less net profit, something is wrong, do something about it!

I was with a business owner yesterday who exclaimed quizzically ‘…when I was doing $750,000 annually I was bringing home $150,000. When I grew to $1.5 mm I brought home $125,000. When I went to $2 mm I brought home $110,000. Now that I am doing $2.5mm I am bringing home $100,000. Whats the deal here, the more I do the less I earn!!!’

How true, how typical, how annoying. How potentially devastating. Here is whats happening to growth curves for many small business owners.

The more they do the less they earn.

The reason is a business not run effectively, not controlled effectively, with no key indicators, no financial reports to support management decision making, no controls, is a runaway train, headed for a crash…and its around the corner.

Simply stated, the larger an out of control business gets the more waste there is, the less profit there is and the less cash there is at the end of the day. Despite the reality that the gross volume is increasing annually, the net worth is decreasing just as rapidly when a business is out of control.

Greater revenue can cover a multitude of sins, but the day of reckoning soon comes when there is not enough profitability or cash flow to continue the juggling act and the walls start crumbling and falling down.

What happens is more waste, more defects more returns, lower pricing through giveaways by the sales men to attract more sales, greater advertising which brings in more business and erodes more profit, more employees are hired to support growth but productivity is very low, cost of materials and overhead is growing rapidly but pricing is typically coming down just as rapidly and the mantra of the business, the driving force, is more revenue not more profitability as it should be.

My small business owner mentioned above was better off doing $750,000 per year and taking home $150,000. then now doing $2mm annually and taking home $100,000. His business is screaming for management leadership. He needs financial reports and a deep evaluation of his opertion and then with this information he can fix it, correct the problems, stem the losses, and stop the leaks.

With financial reports he can see what his real earnings are. With an analysis of his productivity he will learn he has far too many men doing far too little work. With his analysis of his cost of goods he will learn he has not adjusted his pricing for years and while his costs have crept up his pricing has crept downward. He will see his average invoice is smaller and his margins decreased, he will learn his sales force is lowering price with giveaways, long terms, returns, etc. just to increase sales revenues. He will see his advertising budget is way to high. He will learn he has too much inventory and has a few too many losers on his sales sheet. He has too many sales men selling to little and earning too much…and on it goes. Here is the answer:

Less can mean more. Less gross revenue can  contain greater profitability in percentage as well as in actual dollars. Get smaller and more profitable is frequently the message and then grow with control and understanding. Undo the sloppy management style and insert appropriate controls and analysis and then grow with control. That’s the answer.

Clean up, tighten up, make the changes which will result in a cutback of revenue but an increase in profit. Especially in today’s times. Jobs are being lost every day, industry shutting down constantly, overhead rising, people are spending less. Prepare for this by responding appropriately tighten the ship, prepare for declines and focus on profitability…sell less make more, manage correctly. That’s the message.  Need help? call to discuss, 413-549-2966 Norm will set up a teleconference with me.