It’s extremely common for new business owners to focus too much on increasing sales during their first year of operation, thinking that this will automatically solve all of their problems. While this may sound reasonable on paper, this way of thinking is actually dangerous, and often leads to rapid failure.
Before anything else, an important distinction needs to be made: Sales and profits are NOT directly proportional. An increase in sales DOES NOT mean an increase in profits. This is a principle I’ve discussed many times before.
Let’s say you own a large retail store, and you had a special sale with all of your products being 90% off. It would be safe to assume that you’d have trouble keeping your shelves stocked, and you’d see a massive increase in sales that quarter. However, those kinds of numbers guarantee you’ll hemorrhage money, and no business can survive without turning a profit—so what would be the point? Concentrating on sales is one thing, but concentrating on profitable sales is another, and that’s what you really want to do.
If you were to ask 100 business owners how their years were going, 99 of them would give you a sales-based answer.
“It’s going great, sales are up 20%.”
“Sales are up 30%!”
“Not great, sales are down 5%.”
That 100th business owner you talk to will give you a profit-based answer (“Profits are up 30% this quarter.”) I guarantee you that of those 100 business owners, that last one is doing the best because they’re not concentrating on sales. They understand that profit is what matters the most.
In this way, high sales numbers can easily mask a drop in profits. It explains why so many businesses that seem to be doing well on the outside tend to fail. It may be shocking to their loyal customers, who contribute to their high sales numbers, but to anyone taking a hard look at the books, it all makes perfect sense.
You may be surprised to know that there are two periods where businesses are most vulnerable to bankruptcy. The first is the first year of business, where it’s easy to make costly mistakes. The second (and more surprising) instance is just after a business sees a dramatic spike in sales, but we’ll get deeper into that a little bit later.
Let me give you a real-life example. Back in the early ’90s, when I first started my own business, I was acquainted with two business owners who had their own company. During their first year, they were pretty successful, making around $600,000 in sales with a $200,000 profit. Not a bad start. The next year, their sales quadrupled, topping $2.5 Million. However, that very same year, they ran a net loss of $500,000. How does that even happen, you ask?
The answer is simple: They lost control.
When launching a business, there’s a certain point where you have to make the transition from “entrepreneur” to “manager.” For many, this transition is extremely difficult. It’s not impossible to pull off, but it’s easy for rookies to be overwhelmed. If you’re a new business owner, this is something to keep in mind. With that said, don’t be discouraged—buckle down, do the research, and be ready to make that initial jump. Winging it will only get you so far, and profits are all that matter at the end of the day.
Concentrating on sales also prevents business owners from seeing the full picture. When a newer business tends to see a big spike in sales, they don’t always know how to handle it. An increase in sales also means an increase in labor and inventory management costs, and without proper financial systems in place to keep everything in check, business owners will find themselves running into major cash flow problems, despite impressive sales numbers.
Beyond issues with cash flow, these businesses may also struggle to keep up with demand, and as a result, the quality of their service may slip, not only harming their reputation but threatening their futures as well. Concentrating entirely on sales not only has the potential to hurt your business—it could very well kill it, especially if you’re not careful.
Again, profits are your primary concern. A profitable business benefits everyone involved. Your customers get what they need, and you’re able to support yourself, your employees, and everyone else you do business with. Everybody wins, and it’s for this reason alone that you should do more than just concentrate on sales.
Keep in mind that I’m not saying sales aren’t important—in fact, they’re hugely important—but sales alone won’t fix your profit woes. Hard work, research, analysis, and sometimes even painful experience are all guaranteed to help you put in place the systems you need to create profitable sales.
One of the best ways to ensure profitable sales is to create a yearly profit plan, an undeniably helpful tool for businesses, but one that isn’t as easy to do as it sounds. Through my profit coaching services, I can not only help you create the profit plan you’re looking for but also help you increase your bottom line dramatically. I can help you avoid the all-too-common trap of concentrating too much on sales and create clear, concise, practical plans to maximize your profits.
You can also pick up my book 90-Day Profit Reset: Gain Your Independence from Reduced Cash Flow, Evaporating Customers, and Shrinking Margins, which is filled with tips, tricks, and strategies just like this to help turn your business into the profit powerhouse you’ve always wanted it to be.