Thriving in a Market Downturn
Is your business all hat and no cattle? In other words, are you focusing on increasing revenue at the expense of profit?
A lot of business owners focus primarily on top-line revenue growth, even though a business can't be run on revenue alone.
Here are some common misconceptions we see in the market:
Top Producers = Profit
Betting the farm on top producers might leave you without a farm. Big-name sales associates can negotiate high commissions and generous perquisites. Although their volume is impressive, it is not unusual to find companies losing money on their most productive sales associates.
Mergers
and Acquisitions = Profit
One of the most popular ways to grow a business is by acquiring or merging with another company. But if the company was not properly valued, efficiencies don't materialize as expected, or compensation plans are not restructured to reflect the combined company's expense structure, the net result can be negative.
Cash Flow = Profit
In smaller companies, we often see broker/owners who pay themselves with what's left over after expenses are covered. Although this helps ensure the company's cash flow, it's not an accurate accounting of profitability. Owners who sell need to pay themselves as if they were regular sales associates – and compensate themselves for the time they spend managing the business.
How Healthy is Your Business?
Even if your revenue is on a steady upward trend, your business may have hidden profitability problems. Now that you've paid your taxes and have all your year-end numbers, it's a good time to do a quick check to make sure your cattle are growing as fast as your hat.
You'll need a few statistics for the past three years to do the assessment:
- Total revenue
- Total expenses
- Operating profit
- Sales representatives ranked by production
First, look at the trends to make sure both revenue and profit are increasing, and then calculate the percentage increases. If revenue and profit aren't growing at the same rate, that's a red flag.
Now look at expenses. They should be growing at a slower rate than revenue. If not, that's a red flag.
Last, look at sales force production levels for the past couple years. If they're not stable, that's a red flag.
Did You Find Any Red Flags?
If you did, there's still time to make changes. Adjusting compensation plans can help solve some of the toughest profitability problems. We encourage you to discuss any red flags with your accountant, and of course, give us a call to see how we can help.
The bottom line: make sure you don't spend so much time focusing on your big hat that you don't have a place to hang it at the end of the day.
