SALES GROWTH ALONE IS NOT THE BEST MEASURE OF SUCCESS
Sales growth is normally considered a huge success particularly for the small business startup. It serves to verify that the business concept is working and that customers are buying the product and/or service at an increasing rate. But all may not be well; in fact growth without profit could result in eventual bankruptcy. The key is growth with increasing profit. And in this short article, I will suggest a way to do just that, grow your business and grow your profit also, simultaneously. My approach is to focus upon the four major business functions, and how they can be utilized to create and maintain profitable growth for your business. The functions are Innovation, Finance, Marketing and Processes. (Some may recognize these four as the components of the Balanced Scorecard.)
FUNCTION 1 – INNOVATION
Innovation is the process by which both products and processes are improved thereby increasing the value the firm delivers to its customers. Product innovation can be important in areas such as packaging, durability, appearance and style, as well as the introduction of entirely new products and/or services to meet changing customer needs. The firm must focus on what its customers want, not what it has available or can make easily. Real innovation is working from the perspective of what can be, not what is or was. Additionally everyone in the firm, from senior management to office workers need to be looking at new and better ways of doing things (not just their own job, but everything the firm does). Innovation can come from anywhere, and anyone. Increasing value and lowering costs are two of the sought after components of the successful innovation that enables firms to grow sales and profits simultaneously.
FUNCTION 2 – FINANCE
Finance is the process by which sales and profits are planned in advance (through budgets and break-even analyses), monitored while the action is ongoing (through cash flow projections and reports), and evaluated (through profitability reports such as common size and ratio statistics). Every product and service produced and sold by the firm should be subject to the analysis of its profitability which is a function not of cost projections alone, but performance reports by which product price and volume are measured. Product lines need not be stable and predictable. They should be changed to meet the intersection of customer needs and company profitability while meeting those needs. As sales volume grows, so too does the need for working capital which can only increase through rising revenue with increasing profits that occur simultaneously.
FUNCTION 3 – MARKETING
The customer is not always right, particularly when what is being requested will result in a financial loss to your firm. Recent studies have shown that large customers may account for low profit to the firm whereas small customers account for larger profit per order. Obviously the task is to make big customers out of small and profitable customers. The marketing job is to present to all customers the value of the company’s products and services in the most favorable light, consistently, expertly, and realistically. Marketing must use all of the resources available to communicate effectively with customers through social media, traditional media, personal selling, advertising, public relations and any other promotional tools that are available. And the relationship between cost and results must be constantly monitored. One of the best and most cost effective tools available for profitable marketing today is eCommerce because it enables the firm to market on a worldwide basis and thereby tap market potential that would never have been possible in the past. Consistent tracking of product and customer profitability is necessary in order to ensure that there is positive correlation between them.
FUNCTION 4 – PROCESSES
The field of organizational processes is unlimited. It encompasses everything the firm does, including for example, processing of invoices for payment, compensation plans for employees, and of course, production and/or purchasing of material for sale. Production processes are often the largest single cost area that a firm has, and thus a major target for cost reduction. For example, if the firm is operating at a 40% gross profit margin on $500,000 sales volume, production costs account for $300,000 (60% of $500,000), and gross profit is $200,000 (40% of $500,000). A 5% reduction in production cost would produce additional profit of $25,000. Sales would have to be increased by $62,500 to generate the same amount of new profit ($562,500 @ 40% gross profit margin = $225,000, a $25,000 increase over the original figure of 40% gross profit margin on $500,000 in sales.) It is difficult to envision a major increase in sales volume not requiring additional marketing and sales costs, whereas process improvements can possibly be accomplished internally at little or no additional cost. Process improvement and cost reduction is created by paying careful attention to the way processes are carried out and how steps can be combined or avoided making the process more accurate, faster, and lower cost. And of course, lowered costs equal higher profits, once again, simultaneously.
Really effective small business management of growth is brought about by focusing on the four major functions of Innovation, Finance, Marketing and Process. Working toward the improvement of productivity in each major function, it is possible to increase revenue and lower costs simultaneously, thereby enabling the firm to grow and become more profitable in the process.
Further information on how small business managers can utilize the tools mentioned in this article can be obtained at SCORE Hagerstown, 301-766-2043.