Small Business Series - Why Sales Growth Can Still Feel Like Struggle (Ep 1)

Bonus Series And The Goal

Hi, this is Stephen McLain of the Finance Leader Podcast. This is Bonus Episode Number 98. Over the next several weeks, I will briefly introduce some important small business issues that may seem oversimplified to some, but I want to address these issues to help business owners to begin thinking and planning about them and why it matters to their business. So if you are a small business owner, a solopreneur, or if you're considering starting a business, please join me over the next few weeks. Now let's learn together.

Revenue Versus Financial Health

Let's look at our own business financials and our system to see if we can change something in our operations or our processes to make our business more financially healthy. And I will be looking at my own also. I will begin with revenues and profit. Your business can generate more revenue than ever before and still leave you with less cash, more stress, and very little profit. Revenue may tell you how much you sold, but it does not tell you how financially healthy your business is. If sales are increasing, why does it feel like the business is struggling? Now let's go over a few details about revenues. Now revenue is the top line figure on your profit and loss statement. It is the number before you apply any discounts or coupons or subtract out your raw materials and all of your allowed business expenses. Now, when you are making sales, you may feel like you are making money, but your business bank account might be near zero or your credit card might be maxed. Now what is happening here?

Revenue Gross Profit Net Profit

Now let's get on a common language about three important numbers in your business to further illustrate this point. Now the first, of course, is revenue, which is the total amount earned from selling products or services before expenses. Now the next is gross profit, which is what remains after subtracting the direct costs of delivering those products and services. And finally, net profit is what remains after paying all other operating expenses, including software, your rent, insurance, your payroll, marketing expenses, professional fees, interest, and other overhead. Now here is a simple example to illustrate this. Now follow along. A business generates $20,000 in monthly revenue. It spends $7,000 delivering the work and another $11,000 on operating expenses. Now the owner may celebrate $20,000 in sales. Now who wouldn't? That's a great number. But the actual net profit is only $2,000. A very simple example for sure, one that may resonate with many small business owners.

Why More Sales Can Hurt

Now further, let's discuss a few scenarios to illustrate what's happening here. The first, the owner may be underpricing. Every sale creates more work, but the price does not adequately cover labor, materials, overhead, and of course risk. Now the second one is growth may introduce additional costs. More customers can require contractors, employees, some additional software, some advertising, more inventory and more expensive inventory, office space, and also equipment. The third issue is that certain products, services, or customers may have weak margins. They contribute revenue but consume disproportionate time and resources. Now the fourth issue is discounting may increase sales volume while reducing the amount earned on each sale. And finally, the owner may overlook hidden costs such as revisions and travel, payment processing fees, these are always hidden. Administrative time, which is sometimes hard to calculate, returns on that work, rework, maybe you made a mistake and get a rework it. That costs you labor, that costs you materials, and then, of course, unpaid consultations. Now, not all revenue is equally valuable. Some revenue strengthens the business, while some revenue simply makes the owner busier.

Four Questions To Find Strong Margins

Now, as a business owner, here are four practical questions to ask and continually ask. This is a model that I want you to follow, and I want you to look at your products and services to see if these apply so you can make changes to your business. Now, the first thing is which products or services generate the strongest margins? Okay, the next, which customers require the most time, revisions, or support? Next, are prices covering both direct costs and business overhead? That includes your variable and fixed costs. And finally, which expenses are increasing faster than revenue? You should be reviewing profitability by product, service, customer, or project rather than looking only at total monthly sales. Now, in the beginning, it does not take a fancy accounting system to track this. If you are doing nothing now, even a simple spreadsheet will be fine to track your profitability so you can make better decisions regarding your product and service mix.

Quick Profitability Tracking Exercise

Now, for action today, choose one product, service, or client project from the last month, write down the revenue it generated, every direct cost associated with it, the time required to deliver it, and any additional support or administrative work. Then ask, was this truly profitable? Now, once you have an answer, repeat the process for your next three largest revenue sources. I believe that this exercise will help you see your numbers better and help you to plan product service mix that makes sense and have you look at your expenses and your customers in a different way.

Build A Business On Profitable Revenue

Now, we talked about something important today regarding your top line revenue. Revenue growth is important, but sustainable businesses are built on profitable revenue. The goal is not simply to sell more, the goal is to understand which sales create the greatest financial return and then direct more time, attention, and resources toward those areas. Now do not judge the strength of your business by what comes in, judge it by what remains, and by whether what remains is enough to support you, protect the business, and fund future growth. For more practical guidance on cash flow, pricing, profitability, and business growth, follow this bonus series and share this episode with another small business owner who may be focused on sales, but not yet measuring what those sales are actually producing. Now have a great week, take care, and thank you.