Many new business owners begin with two primary goals: make a profit and grow a business. And these goals seem pretty closely connected, too. After all, a growing business is a profitable business, right?
Not always. While it might sound counterintuitive, more sales don’t always equate to greater profits. In fact, the demands and stresses that come with organic sales growth can seriously depress profits—or, in the worst case scenario, even cost a business money or ruin its future viability.
That’s a sobering thought. Starting a successful small business isn’t easy—80% fail within their first 18 months by some estimates—and the idea of a company falling victim to its own popularity is downright heartbreaking.
With that in mind, let’s review why your sales might be growing even while you lose money, and end with a few savvy steps you can take to minimize those growing pains.
Striking a Balance Between Growth and Profit
There’s an old joke in the small business world: “We lose money on every sale, but we’ll make it up in volume.” This bit of sardonic humor hits close to home for many owners of small enterprises struggling to balance growth with profits.
In other words, if a business owner is willing to cut her prices in half overnight, a flurry of growth is all but certain to follow. Yet this “growth” is ultimately detrimental to the long-term prospects of a business when it doesn’t lead to profit.
How Fast-growing Businesses Lose Money Quickly
There are plenty of ways that a small business can lose money during a period of increased sales. Let’s talk about a few of the most common:
- Fast growth often requires more space. The complications and expenses that come with leasing a bigger building or expanding to new locations can be considerable.
- Growing like crazy? You’ll need more inventory—and the money to pay for it.
- Speaking of inventory, can your suppliers provide you with what you need to accommodate your new sales volume? If not, can you locate new resources at competitive prices?
- Labor is one of the largest capital costs of most businesses—up to 60% of expenditures, by some measures. As your number of employees increases, you’ll also need new layers of management: it’s not necessarily linear growth here.
- The larger a business gets, the more complex its legal, financial, and regulatory issues become. Grow fast enough, and lawyers, accountants, and auditors are going to take a slice of any revenue that your company brings in.
Other Growth-Related Concerns
Not enough money isn’t the only challenge a growing business might need to confront. If sales skyrocket, the pressures on existing employees rise. Understaffing a business could cause serious morale problems or even burnout, with staff taking extra sick days.
Clients, too, can be adversely affected by unsustainable sales growth. When you’re small, it’s easy to provide a personal touch. But rapid growth can wreak havoc on your efforts to maintain a consistent level of customer service—and if your customer service declines, clients probably won’t be thrilled that it’s because of the newfound popularity of your business. Instead, they might feel slighted and withdraw their patronage. Rapid growth doesn’t help if the loyal customers who formed your reliable client base are walking away.
Sometimes assuming debt to finance growth makes perfect sense. If a new client wants to double your sales, but you can’t meet this request because you can’t afford the inventory, a short-term loan could be the best course of action. It’s important to exercise good judgment here, though. Borrowing too much—or borrowing for the wrong reasons—often creates an unsustainable burden. So if debt is going to help fund your company’s growth, it’s critical to make such decisions carefully.
It’s also important to stay grounded. When sales spike dramatically, it’s easy to lose perspective and start dreaming about new locations, franchises, IPOs, and everything else that a growth-focused new business owner dreams about. It’s okay to dream—that’s probably what led to you starting a small business in the first place!—but don’t get lost in the clouds.
Ultimately, it’s important to ensure that you don’t become so consumed by riding a tidal wave of growth that you lose sight of what made your company successful. Too much growth happening too quickly can be just as damaging to a company as sluggish growth.
Growth is the lifeblood of business—unless it’s uncontrolled and unsustainable. In that case, growth can be dangerous to your company’s long-term viability.
If you’re concerned that your business might be growing too quickly, here are a few questions to consider:
- Has customer feedback become less positive?
- Are expenses outpacing profits?
- Have there been any sourcing problems? Can vendors and suppliers keep pace with demand?
- Has customer attrition increased?
- Is workplace morale suffering?
If the answer to these questions is “yes,” it might be time to evaluate your company’s growth trajectory. Too much of a good thing can indeed be dangerous to your business’s long-term prospects.
The post Why Your Sales Are Growing—But You’re Losing Money appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/2016/01/28/growing-sales-losing-money/