Why do you have unsatisfactory profits when the sales is rising?
BY AMITMITTAL, Business Coach, Consulting & Advisory
Your business had a great year. Your strategies went well, and sales rose to 15%. Excellent. But when your accounts department delivers the annual financial reports, it shows a 10% reduction in profits. What can be the reason behind it?
Ofcourse, 10% of low profits is only in books. It is what an accountant does, manage the company books and calculate profits. You got your salary, so even if profits are slightly down, its not a big concern. Is it? If the profits are down, you have to pay fewer taxes. Which mean you’re good to go, right? Wrong! Its not good news.
Profits are more than just entries in the company books. They are a statement of your performance, and if profits are down, it means you did not do well this year. And, if there is an increase in sales, but profits are down, the situation calls for your undivided attention. If you don’t take care of it now, the next year will be the same story. Revenue must increase a bit to maintain profits.
The questions you need to ask yourself are:
Why didn’t your profits go up with increasing sales?
Where did you make extra expenditure?
Why were profits down?
Once you know the cause of the problem, it will be easier to find a solution or construct a strategy. First, figure out if costs have increased more than expected? It can be any reason; as mundane as water and electricity bill. Or have you invested in a project that ran past schedule? Did you spend time and money in recruiting staff and training them? Any expenditure, raising management costs that demanded extra payment?
Profits can be down for any of the following reasons:
- You lost some of the premium customers due to which your profit went down as you could not make up with the additional sales.
- Your profits could be low because you didn’t increase prices due to market competition. If the expenditure rose, you could have increased the costs of your products and services. In this case, there can be an initial backlash from customers but for your business, raising prices is essential to achieve target profits.
- And lastly, the low profits can be because the mix of sales changed. It means that the lower-margin volume increased while the higher-volume margin reduced. In other words, the commercial volume went up by 10%, but in-store volume went down by 10%. In this case, because the commercial volume is at a lower margin, overall profit is reduced.
How to meet profits goals?
So, how can you increase the profits from the sale of your products? Do a thorough analysis and figure out what is the reason behind reduced profits as mentioned above. You can decide to take any or all of the following steps to achieve your profit goals:
- Increase sales of higher-volume margin products by raising the prices of these products.
- You can grow the company’s base of products by getting the highest sales volumes and profits.
- Convert the lower-margin products to higher-margin products by increasing their price as well.
The key to achieving these goals is to offer the best customer care service to keep your customers happy and satisfied.
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