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