Have you ever wondered why your profits don’t always increase despite growth in your sales?
Our Managing Director, Graham Potts, recently took part in the first in a series of LinkedIn Live sessions “Grow with Graham” where he looked at the steps you can take to secure your business’ financial standing for the future and have a clear sense of direction going forward.
Here’s what he had to say…
In our experience, business owners generally are in control of the business when dealing with low sales volumes. They’ve got a good ‘feel’ for the business. As sales increase and they take on more staff that feel reduces. Then, when they notice profits dropping, they often don’t understand why.
There could be a number of reasons this is happening, but the general feeling is ‘well sales are growing so profit should be growing too’.
Are your internal systems set up correctly?
When business owners find themselves in a similar situation, we often find that their books, records and systems they use to produce their management information either wasn’t set up correctly, or just as likely the business has changed considerably.
Whether it’s FreeAgent, Quickbooks, Sage or even Xero, if it’s not set up correctly for your specific needs and reviewed when the business grows or changes direction, then you won’t get the right analysis or breakdown. As a result, you won’t understand which products, services, customers, markets etc are making or losing you money.
Profits aren’t growing in line with business growth. What does that look like?
For example, we had a client who was very stressed, working very long hours and didn’t understand why they weren’t more profitable with the large sales growth.
They were going through a difficult family situation so couldn’t concentrate on either the business or their family fully. They didn’t know if they had enough cash to pay staff and felt guilty about neglecting what was happening in their personal life.
So how do you go forward?
You should break the sales and direct costs into more manageable groups or “chunks”, such as by:
- customer groups
This can be hard if your systems cannot produce this information, but with a little help you may be able to work out a rough split.
Often we find that their is one or more areas where the gross profit is low. In the case of one of our client, they used the same percentage profit markup on all markets. But when we compared their pricing to actual results we found that Market 1, which contributed a high value of turnover, in fact was providing little to no gross profit. And when we allocated out the overheads between the markets, Market 1 was losing them money.
They thought they were making less margin due to a number of problems, but when we showed them our analysis they were shocked at the scale of the losses.
We found that this poor performing market was mainly due to the type of businesses they were dealing with. Aggressive customers, delivery problems, quality and staffing problems, the list goes on. So after careful review of the results, the client decided cut back on selling to that market.
What’s the impact of cutting back?
They renegotiated some contracts, stopped others, made changes to the labour force and focused on the more profitable markets.
The next year, sales were down about 10% but profits had more than doubled.
Essentially, after a year the bottom line had more than doubled for less work.
The client felt more in control of the business and was able to spend time with their family without feeling guilty. They had a much better work-life balance and felt relieved that they had surplus cash in the business with enough money to cover at least a couple months overhead.
High turnover, but low profits: what can you do?
- Know your numbers – you’ve got to make time to understand your numbers as you grow. If you don’t know your numbers, find someone who can help you understand
- Trust your accounting system – we recommend using a real-time cloud-based system like Xero. If it’s set up properly, all the information will be there
- Take advantage of training – learn how to maximise Xero’s potential so you can look at your numbers with confidence
How can Wessex Commercial help you?
Change is constant and business has been through a lot in th epast few years with Covid, Brexit and the Ukrainian war. However, with the right help and support you can still get the right information to help you make the right decisions.
Business is all about making tweaks, and little tweaks add up to give you much better results. Having a system that runs properly gives you the tools to make the right decisions.
So if you’ve got the right online system which is reasonably up to date, then we can help support you by either helping you keep it up to date or logging in to check your numbers and help support and advise you on your business journey. All you need to do is get in touch!
If you’d like our support getting your business on track, book a free one-to-one with Graham today: