This Year, Don’t Mistake Sales for Profit
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If sales numbers were all there were to building a successful and profitable business, everything would revolve around sales. The problem is that it’s not what you make, it’s what you keep.
Many years ago, we brought this fact of business to the attention of the Austin Business Journal. Every year it puts out a “Book of Lists” with the top 25 companies in our area by category. In order to create that list, they use a questionnaire. Those that think they are a top company complete it and are scored. We were one of those top companies in Management Consulting several years ago.
For 15 years we held an event called the Heavy Hitter Dinner (aka, Inc. 500 Dinner) celebrating the companies in Central Texas selected by Inc. magazine as the fastest-growing privately-held companies. The Inc. 500 (now Inc. 5000) list is based primarily on two previous years sales. It was really interesting and exciting to meet these entrepreneurs and hear their stories of how they overcame obstacles and grew and grew.
But there’s a problem with selecting sales as the criterion for success. You can invoice millions of dollars but if most of that goes out in costs, you really aren’t a million-dollar company. You are whatever was left after all the bills — including the owner’s salary — are paid. If you are a retailer, reseller, or ad agency, you are probably very aware of this. Ad agencies, for instance, can generate large sales for ad space online, in print, and on TV but most of this goes right back out the door. They usually get to keep only about 15 percent. We know because we were an ad agency before we started focusing on making the whole business profitable and successful.
It can be subtler in other kinds of businesses. What about those Inc. 500 companies? We found something interesting when we were inviting them to be honored at our Heavy Hitter Dinner the year they were chosen. Some of those businesses were no longer in business when the announcement was made. High sales didn’t mean they were profitable enough.
Then there’s the hype around the Shark Tank businesses or The Profit. Don’t take for granted that they are successful and profitable because their sales increased. When they talk about where they are now, ask yourself, “But what do they have left?” Also ask, “How many hours did they have to work to get these sales?” If there’s not at least 10 percent profit left, they still have a lot of work ahead. If the principals (owners especially) put in too many hours and ended up not getting paid what they would have in a comparable job, there is something wrong.
Now look at your business. If your sales are up but profits are static or down, you have work to do. Sales are ONE measurement that contributes to profitability but not the only one. Being profitable isn’t as easy as people think.