In this commentary we will discuss: “How Small and Mid Sized Firms Grow” we will discuss evaluating growth in sales vs. profits
All we hear today is the importance of growth; but there is a big difference between profitable growth and growth just for the sake of growth. In its most basic terms growing sales is relatively easy, just sell your product or service at below cost. You will likely have all the sales you can handle as you are going bankrupt. Anyone can give away the store, but it takes a business person to make money at it.
Many firms manipulate their financial statements to make unprofitable sales look profitable, these are primarily public companies that need to keep their stock price up. But we will not be talking about creative accounting. Another way to grow is to get an order that at face value is not profitable, but through legitimate avenues such as cost reduction, becoming more efficient, restructuring and finding a way to add on charges. Sometimes one takes unprofitable business as a loss leader, to either secure profitable business later, or as an accommodation to an important client.
We will discuss here taking business “to be competitive” when that business was available for good reason, namely that no sensible competitor would take the order and there is no way the make it profitable, use it as a loss leader or to retain a good client. We are speaking not of understanding business economics and taking business for the sake of the top line and not figuring out its impact on the bottom line. It is surprising how many companies do this and not only take on business at a loss and further its impact on its line of credit and cash flow.
A good business person will often find a way to negotiate a better price by emphasizing quality, reliability, value added services, payment terms and the like. The key here is to get with the person who values these items as opposed to procurement and only cares about the lowest price they can get regardless of the financial impact it may have on their company as “that’s my job”. The good business person will try to bring into the meeting those who will be impacted by just getting the lowest price that procurement hung them with and objects that one gets what they pay for. This is particularly effective where someone’s bonus will suffer by this type of thinking and they will become your ally, pushing back on unreasonable pricing that they and the company as a whole will ultimately suffer for financially. And when nothing works be able to walk away from a bad deal.
In our next blog we will discuss the value of building a brand name.
To see all articles in this series please go to http://optimal-mgt.com/blog.
Optimal Management is the premier management consulting company to the staffing industry. We act as mentors to owners and managers to maximize their sales, profits and value of their company. We become an extension of our clients operations and are there for all of their staffing and business needs, from sales, marketing and compensation plans, to finance, M&A, general management and everything in between.