More Sales Does Not Equal More Profits

In 2007, the year of our so-called “great success”, my team was working themselves into the ground. Not because we didn’t have enough sales, but because they simply weren’t as profitable. By constantly adding and inventing new products to sell, we gobbled up storage space, ran up our expenses and ran our team ragged. We were operating under the illusion that by selling more, we were making more. And no matter how you sliced it, increasing sales alone did not suddenly make us more profitable.

Victims of the Marketing Guru’s : Increase Sales = Increase Profitability

When we continued to add new products without considering the toll it was taking on the business, it strained our resources. More sales only increased cash flow for a few months, and might have made it seem like we were doing better.

But continuing in this frenzied behavior, the long-term impact would have been devastating to the business. In fact, when we looked at the numbers closely, any significant increase in sales without a subsequent change to internal processes could have ruined the company by the end of the year. Sometimes inventing new products won’t solve your real problems.

Questions to ask before choosing to expand product lines, grow the business, etc.

• First, explore the big picture and ask “What is the real impact of adding 10 new products?” On you? Your employees? Your customers and your business?
• Quantify the cost of anything and everything (difficult processes, too many products, too little inventory, unsatisfied employees. They all have a cost and it usually comes off the bottom line. Whether its lost time, productivity, lost revenue, lost opportunity — every frustration is ultimately costing you money.
• Finally, keeping the first two steps in mind, observe the frustration objectively. Avoid blaming people, and instead, focus on the systems. Walk step-by-step through the sequence of events until you’re able to dissect what’s really going on. You’ll probably identify areas that can be improved immediately, simply through careful observation and tweaking the system.

I hear it so often, entrepreneurs are always asking or saying, “if I only had more sales, my problems would be solved.” Top line revenue is great–the larger the number the better, but bear in mind that when it’s time to sell, companies are sold based on profitability, not overall revenue (At least not in retail).

What about you, do you have any stories to share with us about how your company survived growing pains?

Tune in next time for more tips on how we managed to dig ourselves out of the hole and become profitable again.

By: Shirley Tan