Business development 11 August 2015

Don’t get dazzled by revenue growth – all that matters is profit

A relentless focus on delivering ever- increasing sales targets without regard for the bottom line creates a dysfunctional culture
A relentless focus on delivering ever- increasing sales targets without regard for the bottom line creates a dysfunctional culture

“I want to double my turnover in the next three years,” is something I’m hearing increasingly from clients. And when I ask them how much profit they’ll make, I’m met with a blank stare.

Too often they don’t even know why they want that turnover goal. Maybe it’s something they’ve heard or read and think that’s what they should be aiming for, but have little idea of what profit they’ll have left to show for it all at the end of the year.

I think that turnover growth is a blunt measure of success, but one that is in danger of being valued above all else. Rapid turnover growth will magnify any problems or weaknesses in your business, and growing by 33 per cent a year will put immense pressure on you and every part of your business.

Too many companies focus all their efforts on growing their sales but don’t see much improvement on their bottom line. The most common thing I see is that the percentage net profit falls every year as turnover grows, making their business more vulnerable.

What we really want is safe and controlled growth.

I say flip the thinking. Start off by being really clear on what growth means to you. What is it you want? Earning more for yourself, building cash reserves, or is it just the ultimate vanity exercise of growing turnover because that’s what the business rat race says we should be doing?

Rather than starting with sales, start with how much profit and cash you want to make, and work backwards up to the sales line.

A relentless focus on delivering ever-increasing sales targets without regard for the bottom line inevitably creates a dysfunctional culture that can create lasting damage.

Why do we need to focus on bottom line profit? Well profit drives cash, which every business needs to survive. And growth eats cash, so a fast growing company needs to focus on profit and cash more than ever. Considering that a business in the UK has about a 40 per cent chance of getting to their fifth birthday, generating profits and cash has to be a top priority if we want our companies to survive in the long term. Whoever sets up a business thinking they’ll just do it for a couple of years?

So why does a focus solely on revenue so often result in less profits, surely profit should follow sales? These are the most common areas that we see in growing businesses:

  • Taking lower gross margins just to hit sales targets
  • Taking on business that doesn’t fit your business model or strategy just to hit targets
  • Compromising on the type of business you want to do; taking on demanding low quality customers who will drain your resources and probably not pay you on time
  • Finding good quality sales people quickly enough to keep the sales growing can be an expensive trial and error exercise
  • Paying sales bonuses on turnover, regardless of how profitable that turnover was
  • Less efficiency; the business grows too quickly and can’t keep up with itself. Processes and procedures break, customer service suffers, and leadership and management issues emerge which all distract you from driving your business forward
  • And as sales grow, overheads have a tendency to grow disproportionately, wiping out profits

So before you embark on a rapid turnover growth plan, get really clear on:

  • Why, exactly do you want to grow – what will this look like for you?
  • What you want your bottom line to look like, and work backwards to the sales line
  • Have you got the cash to support the sales growth?

Instead of focusing on just growing sales, get obsessed with profit. Set gross margin targets and make sure everyone is going for good quality business.

Then before you look to grow sales, look closely inside your business. How can you increase profits with the business you already have. Strengthen your existing business foundations before you throw growth at it.

Image: Shutterstock

Serena Humphrey is MD of financial training company F Word.

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