Does the growth in your business bring more profits?1 min read

by | Blog

A question: Your business has not been growing but it seems as though you add more people and equipment without increasing the net profit. What is not working?
We will give you an answer. Look at what happens in a typical company as the business shows growth. Suppose that a company is netting $50,000 on total sales of $1,000,000 (a 5% net profit). If this company has a 40% gross profit (on items sold), a $100,000 increase in sales should add $40,000 to the bottom line. I say “should” because the increase in sales may cause the need for more equipment, space, or inventory. Perhaps this company should take a closer look at managing how the company grows. Growth for growth’s sake can be financially unhealthy. A better way to increase net profit might be to increase the gross profit on all or most of the items sold. A 4% increase in the selling price would add $40,000 ($1,000,000 x 4%) to this company’s bottom line if the price increase doesn’t cause a loss of customers.
Assume the company sells a top quality product and provides top notch service. These are major facts in the competitive world. If 30% of the current customers account for 70% of the total sales, they are probably dealing with the company for reasons other than just low prices. Sell these customers on the fact that a slight increase in prices is necessary to maintain the quality of product and service that they expect and deserve. Good customers would like the company to be around in the future and should appreciate and understand the need for increasing prices.
When adding equipment or increasing staff, you have increased the level of sales at which you can break even. If your company is now feeling the need to increase its capital investment, perhaps your manager should look first at increasing the price for which the product or service is sold. Just a thought.

By Kathy Hopkins

Kathy has been a practicing accountant since 1985 and provides a vast repertoire of services that include budget comparison, reporting and analysis, QuickBooks® training, cash flow projections, financial analysis, compilations, reviews, audit preparation and management, as well as strategic planning.

View bio | Read more articles

Here are a few additional articles you might be interested in:

Office Manager

JOB DESCRIPTION Position: Office Manager Department: Administration Status: Full Time Position Summary The Office Manager ensures the smooth, profitable operations of the Simons Bitzer office and provides comprehensive support to the Managing Principal....

read more

Staff Accountant

JOB DESCRIPTION Position: Staff Accountant Department: Accounting Status: Full Time Position Summary The Staff Accountant provides intermediate to advanced accounting services to a regular portfolio of customers. Responsibilities Chargeable work (83% of total hours)...

read more

Should You Elect Out of the New Partnership Audit Rules?

The Bipartisan Budget Act signed into law in 2015 and effective for partnership returns filed for taxable years beginning after 2017 has significant impacts on partnership audits. Most notably that audit adjustments are to be recognized in the year an audit is...

read more

Can we help you find something?

Want to continue the conversation?

© 2020 Simons Bitzer & Associates, PC  Privacy Policy

© 2020 Simons Bitzer & Associates, PC

Privacy Policy

Share This