Know before you grow.
I met recently with Mark, a business owner, to talk about his sales revenue. He explained enthusiastically, “We exhibit every year at the major industry show, and this year we doubled our sales.” When I asked about his profit from the show, he answered more quietly. “We lost money,” he admitted.
At some point in the business lifecycle, owners must come to terms with a seeming contradiction: increased sales don’t automatically lead to increased profits. As in Mark’s case, a specific revenue-generating activity can trigger the question: If my sales are growing but my business isn’t profitable, what needs to change? Here’s how Mark answered that question after we analyzed his show results.
Promotions // Mark provided a coupon at the show for 30 percent off a minimum order. Unfortunately, the deep discount was less than his cost of goods sold and left him with a negative margin on sales. Other promotional options, such as costs-aligned discount coupon for a customer’s next purchase, might have preserved Mark’s profit margin.
Payment Terms // Cash is king for a reason. Mark had written several large purchase orders at the show, and had also agreed to 90-day payment terms for those orders. Assuming the up-front financing of these large orders affected Mark’s cash flow and its availability for ongoing operating expenses and other top-line revenue activities. Mark could have minimized the cash flow impact by negotiating terms, such as an early payment discount, or a 30-day payment discount, or increased pricing for 60- or 90-day terms.
Operating Costs // Overhead costs for a business activity such as a show exhibit are a major contributor to balancing the profitability equation. They are also frequently underestimated. Mark’s projected expenses for the show included booth rental, staff travel and accommodation, producing and shipping additional inventory and marketing collateral.
Preparing for the show also required paid overtime for his staff and bringing in temporary help, which he hadn’t factored into his projections. Post-show, his shipping costs increased, and he pulled staff away from other business-critical functions to prepare and ship orders, as well as to provide additional customer service. Including the post-show impact in his pre-show planning would have allowed Mark and his team to anticipate additional costs and minimize the disruption to daily business processes.
Profitability is not a guaranteed outcome of increased sales. It requires intentionally planning for and managing both the costs and opportunities that growth inevitably brings. Whether you’re angling for a big-fish customer, strategic partner, distribution relationship or major sales at a major show like Mark, take a close and balanced view of your sales projections and ask yourself: Is my growth profitable?
