Properly managing a company’s growth is key to ensuring the company remains profitable over time. The four key areas of managing business growth are sales/revenue, expenses, price, and gross profit.
The first key area is sales/revenue. Many companies understand that in order to grow their business, they need to grow their revenue consistently, and that’s true. However, many companies make the mistake of focusing solely on revenue growth at the expense of the other key growth metrics, which could result in increasing revenue but declining profit as a percentage of revenue.
The next piece a company must manage is expenses. Expenses should be regularly reviewed in a monthly financial report. It’s important to review your expenses line by line, and to conduct a trend analysis to make sure that expenses are staying in line with your company’s growth.
The third key area to manage is price. Many companies do not increase prices enough over time because they are worried they will lose customers. However, all your competitors are raising their prices due to inflation, so it’s important to have disciplined price raises over time.
The last piece to manage is gross profit, which measures the profit of the services or products you produce. It is the revenue generated by a service or product, minus the cost to produce that service or product. Gross profit is a very important measure for your business, but it’s often the most difficult for companies to manage since it requires costs to be allocated to the correct revenue lines in the correct months. It’s important to properly assign the costs associated with specific revenue lines instead of lumping everything into general expenses, because this will allow you to see if the costs associated with a specific product are growing out of control. For example, I had a client that was growing year over year in revenue, but over time was struggling with profits and cash flow. After a detailed gross profit analysis, we found that the labor costs associated with one of their products was increasing exponentially and they were running much less efficiently. Once they identified the source of the inefficiencies, they were able to drive those costs down and become profitable again. It’s also important to track gross profit so you know how much revenue you need to generate each month to cover your fixed expenses.
Companies often grow quickly but don’t end up increasing profits, because companies generally become more inefficient as they grow. It’s important to forecast expected revenue and profit increases as you hire incremental employees or invest money in different areas of your business. Then you should track if this actually happened. If not, you need to analyze the cause of the variances. The earlier a company starts doing this, the easier growth is to manage since things get more complicated over time. If you’re disciplined in this area from the beginning and have the right structures and reviews in place, it will be much easier to maintain and grow profits over time.
Sentinel Finance Group reviews these four key areas of growth management (sales/revenue, expenses, pricing, and gross profit) with our clients in our monthly financial reviews. We review KPIs, ratios, and trending expense analysis to ensure our clients always have a solid understanding of the four key growth metrics for their companies, which enables them to grow profits over time.
Sentinel Finance Group is an outsourced CFO firm in Kansas City and provides fractional CFO services and controller services to local businesses.
