The Sales Myth

Let us start by saying that only an imprudent business owner would not want an increase in revenue! But the myth that “sales will hide all evil” is at best exaggerated and certainly misunderstood.

Over 15 years of analyzing and helping small and medium size businesses, I find this is one of the first “solutions” a client will ask for. There is a perception in this business sector that revenue equates directly to profitability and cash flow improvement. In reality, the only true contribution to profit derives from the Gross Margin/Profit associated to this new revenue. The second factor is the effect on overhead that would result from this increased revenue and the associated activity. So before I would say “lets drive this thing up” I would ask myself a few questions:

1. Does my company have a formal Sales and Marketing Plan in place which clearly identifies end goals? Does this plan identify new customer base, pricing parameters, distribution methods, manpower performance standards, compensation methods?

2. In my company do I currently have the Financial Management Systems in place to have fingertip control of direct expenses which will have a direct effect on the Gross Margin?  Direct Expenses are defined as any expense directly related to the creation of revenue. Common examples would be Material and Labor. These two factors alone are the predominant expenses in most companies. When a company does not have fundamental Budgets, Cash Forecasting and Balance Sheet Management in place, a growth in revenue can have devastating effects on the back-end.                      
                                  

Lets stop. If you as President of your company answered no or maybe to these first two questions, then slow down and rethink. I have found the majority of the small to medium size companies I have analyzed are ill-equipped in these areas. The good news is that any company can make the leap as long as they understand that there are massive differences in what separates a $1 million firm from a $10 million firm in terms of an operating culture, and methods. Trust me when I say that “growing out of business” can be a reality.

Another reality you must face is that in many cases for companies in this revenue range the sales of these firms are limited by various demographics that would logically not change. Can you increase your market share in these demographics? Of course. But how and at what price must be a consideration.

When most entrepreneurs start a company, it is because there is a confidence in the ability to exceed competition performance or capture a new product opportunity. But the business side of the business cannot lag or be left behind. This will limit your ability to act in the role of President, which is essential in any company. Certainly this position is critical in any company over $1 million in revenue.

Advice! Act … Feel… Look… Function like a $ 10 million +++ Company. Learn to maximize true profitability at your current level. Then grow that thing to the Moon!

So next time someone is advising you that you need to “Grow your sales”… just tell them “Only a fool wouldn’t want more revenue! But what I really want is profit!”