Business Mistakes to Avoid
Sales Growth Trap
Written by Andrew Goldman for Gaebler Ventures
Is increased sales always necessary for a business? Learn how constantly increasing sales for your company is not always a good thing.
Too often small businesses focus solely on marketing and sales.
They live and die by the mantra: "grow the company at all costs." This decade-old conventional wisdom has been the norm for starting businesses. An obsession with increasing sales at all costs leads to short-term growth and long-term losses. Any company, especially small businesses, must place an equal focus on their operations and meticulously scrutinize their costs if they wish to succeed in today's market.
Small businesses that place their focus on increasing sales, while ignoring costs and profit margins, are setting themselves up for failure.
CEOs of small businesses, eager to penetrate their respective markets, give away their proverbial shirt in an effort to increase sales.
While sales growth is a crucial part of building a business, it must be concurrent with monitored costs and minimum acceptable profit margins. Sure, there will be exceptions to this rule: such as a giant sale that leaves the business with a slightly lower profit margin. The majority of sales, however, must be profitable (and sustainable) for the company. Working as a consultant for small businesses, I've seen this pattern of "sales first, cost-control later" play out again and again. The reasoning is always the same: growth, growth, growth.
While growth is a significant part of the success formula, growing a company with non-profitable sales is like building a house on a soggy foundation.
As costs rise, the small business will find their profits dwindling from minimal, to nothing, to an eventual loss. A small business typically does not have the supplier power to turn to their customer looking to raise prices due to rising costs. Without an initial comfortable profit margin, the small business is growing in the short term, but doomed in the long run.
I recently consulted for a growing business in the natural foods industry. After more than three years, the company had sales close to $2 million. The company's mission and strategy had been to bolster sales and expand their customer base. Their sales mirrored this strategy and they had shown significant growth. The company, however, was hemorrhaging money and the sales team was motivated by closing sales that were not gaining profits for the company.
This company was so eager to get their products on the shelves of national retailers that they were essentially paying to do so. They participated in "free-fill" programs and gave their product away in order to gain a spot on store shelves.
While this strategy matched the company mission statement, there was little cost-analysis or return-analysis completed. Even if the free product on the shelves sold out, the company had made such a sweet deal for their customers that future sales would yield little to no profit. Essentially, while the company gained a giant customer, they lost money and created no real potential for future growth.
There's a lot that can be learned from this simple example.
A company can bring on the largest customers, get their products in every store and still lose a lot of money.
Small business owners need to remember that sales growth is only a piece of the puzzle that leads to success. A company needs to focus as much attention on their costs as they do on sales. After all, a company with $5 million in sales and $4.5 million in costs, makes less money than a company with $1 million in sales and $400,000 in costs.
Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.
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