Business Growth is a Wonderful Thing- Growing Pains

Business growth is a wonderful thing to behold. You’re watching sales boom and are planning your next overseas holiday. But before you do, here’s an easy little primer on how to check if your growth is healthy and will last. And it only needs one of your business reports, the Income Statement otherwise known as Profit and Loss Report.

 

We will make an assumption and assume your business has been around for over 18 months. We want to measure growth over that period.

 

Sales Growth

 

So let’s see what has happened with sales first.

 

Metric Year Months PDays  Year Total  Per Day  Growth Growth Rate
Sales Growth 2012 12 365  3,000,000 8,219
2013 7 212  2,200,000  10,377 2,158 26%

 

So that’s very healthy, above average growth rate, 26%. Notice that in each row we have calculated an average daily sales rate so we can compare the different time periods, 12 months to 7 months.

 

We should be very clear about where our sales growth has come from so we know what to tweak, and hopefully, you have the means to measure these. There are about 6 options, and it could be a mix of them:

 

  1. Increased prices per sale item.
  2. Increased items per sale. This implies increased cross-selling.
  3. Increased sales of more products. This implies a wider range of products.
  4. Increased sales from more customers. This could be a result of a marketing program.
  5. Increased sales from more outlets. This implies a greater distribution network.
  6. Increased sales volume but with lower prices.

 

Just another note, if our business is seasonal then it would have been better to compare the first 7 months of 2012 with these 7 months of 2013 – comparing apples to apples.

 

Gross Profit Growth

 

Next, we want to see how well we have harvested funds from the sales increase.

 

Metric Year Months PDays  Year Total  Per Day  Growth  Growth Rate
Sales Growth 2012 12 365 3,000,000  8,219
2013 7 212 2,200,000 10,377 2,158 26%
Gross Profit Growth 2012 12 365 1,350,000 3,699
2013 7 212 1,000,000  4,717 1,018 28%

 

Because the growth rate of Gross Profit at 28% is higher than Sales growth at 26% we can see that a proportion of the sales growth has come from higher prices.  The main thing is that there has been no leakage of margin from the increased sales.

 

What can affect our growth rate of Gross Profit? Once again, we should know the cause(s) and have strategies for them.

 

  1. Increased selling prices
  2. The increased cost of direct materials used to produce the sold product.
  3. The increased cost of direct labor used to produce the sold product.
  4. the increased cost of direct utilities to produce the sold product.
  5. Increased profit margin from supplier above direct costs.

 

When our supplier wants to increase prices and we are in a position to question, it is good to get an understanding from them of

 

Net Profit Growth

 

Finally, let’s check what has happened with Net Profit.

 

Metric Year Mnths PDays  Year Total  Per Day  Growth Growth Rate
Sales Growth 2012 12 365 3,000,000 8,219
2013 7 212 2,200,000 10,377 2,158 26%
Gross Profit Growth 2012 12 365 1,350,000 3,699
2013 7 212 1,000,000 4,717 1,018 28%
Net Profit Growth 2012 12 365 600,000 1,644
 Before tax 2013 7 212 390,000 1,840 196 12%

 

Here now we can see our sales growth has come at a cost of much higher expenses.
The chart below shows that Expenses have blown out by a massive 40%.
The situation here is not yet going to break us but is quite serious and needs some care.

 

Metric Year Mnths PDays  Year Total  Per Day  Growth  Growth Rate
Expenses Growth 2012 12 365 750,000 2,055
2013 7 212 610,000 2,877 823 40%

 

The causes of increased expenses in a time of growth can relate to:

 

  1. Marketing expense – advertising and brand building. Are we getting value for our investment in increased NET PROFIT, not just sales? Is our new website effective?
  2. Sales expense – the cost of servicing new outlets. Are we focusing our sales expense on the 80/20 basis, in other words, the customers who will give us the greatest return?
  3. Freight expense – the cost of distribution. Have we got the right mix of inventory and shipping schedules to minimize costs? Are there other ways we can ship that is cheaper?
  4. Staff expense – have we gone overboard with new staff to handle the additional volume, or higher salaries for more capable staff, or the addition of another management layer? Should we be looking at technology and productivity improvements to automate processes wherever possible? Can we delegate responsibilities to lower levels with appropriate business rules and reduce the need for middle management?
  5. Utility expense – maybe our increased growth has required additional space and power.
  6. 5. Loan repayments – maybe our growth has been financed by loans and repayments have increased significantly.

 

Working Capital

 

In our previous article, we considered the importance of working capital, which consists of the funds tied up in Accounts receivable (what our customers owe us), Accounts Payable (what we owe suppliers) and Inventory. At a time of growth, it is not unusual for these to blow out unless really well controlled.

 

Especially when Net profit is slipping like this it would be advisable to run those metrics as well. It is quite likely that our DIO ratio (Days Inventory Outstanding) will have increased significantly as well (unless our inventory management systems are really a top class) so swallowing our cash from the sales increase and making the funding of future growth very difficult indeed.

 

Small Business Accounting Software

 

The usual options for people in Bali to consider for accounting software are MYOB, QuickBooks, and Accurate. May I recommend Wave Accounting, which is a FREE web-based application.  See https://my.waveapps.com

 

I find it pretty simple to use, there is plenty of help available, and it gives you all the reports you need.

If you are going to get accounting software then I recommend you go now to an internet (or cloud) based product like Wave, because that is ultimately where all your software will be in the next few years.

 

Meanwhile, keep those emails coming in, love getting your feedback and questions!

 



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