When businesses fall short on profit expectations, the typical reaction is to increase sales. You may feel the pressure to pick up the phone and call a prospective client; you may start to push your sales force harder. “Increase sales, increase sales, increase sales” becomes the mantra of the company.
However increasing sales might not always be the answer. There is a firm difference between sales and profit. I would much rather be the owner of a business with $300,000 and sales and $240,000 in expenses than one of a business with $3-million in sales and $3.2-million in expenses. While this may seem like an overly logical statement, that perhaps wasn’t even worth making, I would like to direct you to the idea that often the difference between profit and loss is not a firm’s ability to close enough sales, but it’s ability to keep the money earned in the business for future strategic investments instead of letting it slip away on poorly managed expenses.
One of my favourite research tools while working with a client to assess the feasibility and financial management strategy of a business is the “Small Medium Enterprise Benchmarking Tool”. The tool is provided free of charge by Industry Canada(http://www.ic.gc.ca/eic/site/pp-pp.nsf/eng/home). This tool pulls detailed financial data on more than 600 industries across Canada. Using data collected by Statistics Canada through the Canada Revenue Agency, the tool can show average balance sheets of business earning between $30,000 and $5-million in sales sliced by specific types of business (using NAISC codes) throughoutCanada. Of the 30 key performance indicators on the report, look at the section called “Profitable vs Non-Profitable Businesses”
The example below shows “Profitable vs Non-Profitable Businesses” section for the category “Furniture Stores”. It shows, that of the reported Furniture Stores,
69.1 per cent are profitable while 30.9 per cent are not. Of the stores performing in the lowest quarter, the average sales between the profitable and the non-profitable were only $400, but the profitable ones had an average net profit of $19,000 while the ones that lost money lost an average of $26,000. At the risk of over simplifying, they were only $400 apart in sales, but bottom line on their balances sheets were $45,000 apart.
Similarly, of the lower middle quartile of businesses, the profitable firms made on average $200,900 in sales while the non-profitable ones made $204,700. However, the profitable kept on average $27,300, while the non profitable, even though they had more sales, lost $32,900.
Taking on expenses is a necessary evil of growth for any business wanting to get to “the next level”. If you are thinking about taking a big step in your business that will force you to spend more, whether you are hiring an employee, moving out of your basement to an office, signing on for a series of tradeshows, the key to success is planning.
- Use a cash flow projection worksheet broken down month by month to assess what impact your spending will have on you bank balance and how your increased spending will increase revenue.
- Define in your business plan “key indicators” that will demonstrate your readiness to take a next big step.
- Conduct some research to make sure the market or your staff has a need or want for you to open a new office or implement that new piece of technology.
I challenge any reader that is planning a new venture or is already running a business to take a look at your industry using the SME Benchmarking tool. Assess where you want to be and implement the financial management procedures necessary to keep your business’ money on the balance sheet as profit.