An increase in sales doesn’t always lead to an increase in profitability.
In fact, growth can be extremely costly if organizational efficiency isn’t a priority.
How can this happen?
As a business grows, so does its expenses. Some expenses are fixed, such as the cost of administrative overhead and direct labor. However, other expenses are variable, such as employee wages, materials, production supplies, and payroll taxes.
Growth will always incur costs to the business, so management must always have a complete picture of cost structure. Do you know which strategies are working? Where should the business be focusing its resources in order to maximize future growth? These are key ingredients to scalable growth.
Understanding the Top Reasons for Declining Profitability
It’s typically easy to pinpoint the two main reasons for declining operating profit. Most businesses either have a decrease in sales or an increase in expenses.
If sales are up but profits are down, then this likely means that the decline in operating profit can be attributed to an increase in expenses.
For most businesses, the culprits for rising costs include:
Increased overhead expenses. Even if many of your employees are working from home these days, the cost of your office space could be more expensive than in previous years, depending on rent and tax increases. Do you provide annual raises to long-term employees every year? This can quickly add up, especially if your company employs hundreds of workers. Still, if your manufacturing and overhead costs are the same despite increasing sales, you could still see losses from debt-service costs. For example, even one late payment on a business credit card can result in increased interest rates and higher monthly payments.
A change in mix of sales. Most businesses offer more than one type of product or service — and it’s normal for profit margin to vary from product to product. If lower-margin sales have increased while higher-margin sales have decreased, then that could explain the falling profit. For example, let’s say an air conditioning company profits more from commercial units and less from residential units. If residential volume went up 15% while commercial sales decreased by 25%, that could explain the lower profits even though overall revenue increased. It helps to know this breakdown of numbers, because this information forces you to act.
One-time costs. In some cases, lower profit can be attributed to one-time events rather than a structural issue with the business. If there was an incident on site, for instance, and the business had to pay the medical expenses for the customer, that could explain a smaller bottom line. Or if inclement weather resulted in damage to your building and insurance only covered half the costs, then you would have to spend money to put yourself back in business. Even if these are one-time events that likely won’t happen again, it’s important to understand how they impacted the bottom line and how you can prepare for unexpected costs in the future.
These are just some of the factors that could result in declining profitability even as sales increase.
So… that raises the question: what’s the fix?
Measure and Evaluate Your KPIs in Real-Time
We live in a changing world.
This year alone, we have witnessed ever-evolving stay at home orders, economic uncertainty, and natural disasters.
It’s not enough to adjust your strategy based on quarterly earnings and statements.
Instead, the businesses that are thriving are measuring and evaluating their KPIs in real time. There is no single formula that can result in cut costs and increased profits. Instead, it’s important to analyze current performance, customer behavior, and then determine the best course of action based on those findings.
At Exceptional Services, our state-of-the-art performance management software can measure and analyze your KPIs in real time. This allows us to develop, communicate, and help implement a powerful framework for an optimized strategy. To maximize your bottom line, it’s critical to optimize organizational performance and growth.
What Businesses Can Benefit from Real-Time KPI Analysis?
The good news is that no business is too small or large to benefit from real-time KPI analysis.
Major corporations, for example, have multiple processes when it comes to supply chain management, workforce productivity, and resource management. But it’s not just major corporations. Any business that generates over $1 million in revenue yearly will need to have a strong handle on its processes to continue growing and adapting to a changing market.
On the other end of the spectrum, small businesses that operate on $75,000 - $100,000 in yearly revenue typically operate out of their homes. When you think of entrepreneurs “starting up” in their garages, they often fall into this category. Because they operate a “guerilla-style” business plan, they have a strong understanding of their target market and potential. The downside is that while they have a clear vision of the finished product of their business, they don’t necessarily have a clear vision of the journey itself. These small business owners could certainly benefit from a needs analysis that lays the foundation for long-term strategic growth.
And in-between these two extremes are businesses operating at revenue levels of $100,000 to $200,000. They’ve exited out of the home office stage and have reached a new level of stability, but they’re not quite in the big leagues yet.
No matter what stage your business is at, there is always an opportunity to strategize and maximize organizational performance.
Why Hire Exceptional Services
At Exceptional Services Agency, we have a performance management system and software that allows us to provide KPI measurements in real-time. This allows us to provide our clients with a powerful framework for building and communicating strategy.
We’ve worked with businesses ranging from major corporations all the way to those in the start-up phase and companies in-between.
If you’re unsure where the opportunities are for your business to continue growing its profits, Exceptional Services Agency is here to help!
You can contact us online or email info@exceptionalservicesagency.com.
We’re also available via phone at 504-533-8859.
