Growing Sales Don’t Always Mean Growing Profits
Increasing turnover is usually welcomed by business owners. More customers, more invoices and a growing order book can all suggest that the business is heading in the right direction.
But increased sales do not automatically mean increased profit.
For businesses in Gorey, Wexford and across Leinster, one of the most useful questions to ask is not simply “Are sales growing?” but:
Is each additional euro of revenue generating an appropriate return?
A business can become significantly busier without becoming significantly more profitable.
Why can profit fall while sales increase?
There are several common reasons.
Wages may have increased. Suppliers may be charging more. Additional customers may have been won through discounts. Overheads may have grown as the business expanded.
There may also be significant differences between the profitability of individual customers, products or services.
If those factors are not monitored, turnover can continue rising while margins gradually deteriorate.
This is why good financial management should look beyond the sales figure.
Gross margin is an important indicator
Gross margin shows how much of your sales remain after the direct costs associated with delivering them.
If turnover increases by 20% but your gross margin percentage falls significantly, the business may be working considerably harder without generating the expected additional profit.
For many SMEs, reviewing gross margin regularly can highlight problems long before they become obvious in annual accounts.
Have your prices kept up with your costs?
Pricing is another area that deserves regular attention.
Insurance, wages, software, utilities and supplier costs can rise gradually over time. If customer prices remain unchanged, those increases are absorbed by the business.
That can steadily erode profitability.
Sometimes improving business performance is not about finding more customers. It is about ensuring that existing work is being delivered at an appropriate margin.
Use management accounts to understand the business
Annual accounts are essential for compliance, but they look backwards.
Regular management accounts can help business owners understand what is happening throughout the year.
Useful reporting might include:
revenue by month;
gross margin;
operating profit;
customer or product profitability;
overhead analysis;
cash position; and
performance against budget.
For a growing business, this information can support better decisions around pricing, recruitment, investment and expansion.
Accountancy and commercial finance support in Gorey and Wexford
Podium Finance provides management accounts, accounting and commercial finance support to businesses in Gorey, Co. Wexford and throughout Leinster.
Our focus is not simply on producing accounts after the year has ended. We help business owners understand the numbers behind their business and use that information when making commercial decisions.
If your turnover is growing but the improvement is not appearing in profit or cash, it may be worth looking more closely at your margins, pricing and underlying cost base.
