Low Profits but Good Sales – Why does that happen?

Maybe you have just started your business and it is a low tide sweeping your business to dry land or your 5 year old business has suddenly been showing fewer figures than you were used to; it is a fact that all businesses see good sales but low profits once or more than once in their lifecycles.

What does it mean? Should you think it’s a ‘phase’ which will eventually pass or lose your night’s sleep over it?

 

profit, revenue

 

Let’s define profit for starters. Your revenue minus your cost is your profit. So high revenue should mean good profits. If it doesn’t then there is definitely something wrong with that chunk that we call ‘cost’. And that is a huge one.

The following could be the reasons:

    1. The general rate of inflation. Every year prices go up 2%-5% depending upon the commodity or service you are using. Everything from raw materials to salaries are hiked up. Employees wait for their annual increase and the international oil prices hike up affecting raw products that we use.
    2. The taxes went up. The tax authorities imposed a new tax that applied in your sector or the indirect taxes went up. This will also impact your net profit even though your sales show a marked increase.
    3. Did you account for a new expense in the entirety or a chunk of it while you will be reaping its benefits in the years to come? Accounting practices sometimes tend to show lower profits because of payments that your company made in their entirety while the asset will be used for a number of years to come. Depreciation is a good example.

 

tax,taxes

 

If you have checked for all these indicators and you still seem to be getting low profits with better sales then I would suggest giving your bank accounts a thorough check and maybe even changing the accountant. Get someone else to go through your financials and see if you can track the problem.

For most businesses, the dip can be temporary lasting a quarter to a year. If your dip has lasted you more than an year, your business strategy may be something you want to reconsider.

Here are a few pointers to get you started:

  1. The Budget: Your budget is not accounting for the ‘expected’ inflation and has been working with real numbers. You may want to incorporate numbers that you ‘expect’ your company to incur rather than the exact figures. The budget is a very important feature of any business. Incorporate one to know where you may stand months from now.
  2. The Sales: Are your sales channels reporting correct figures? This can happen when you have multiple channels of distribution/sales and limited manpower. Try revising the SOPs.
  3. The Cost: Is it possible to reduce your cost? Is there some cost that could be eliminated or some raw material that can be sourced at a cheaper cost? Could a process be introduced that automates production (if you manufacture) reducing major costs associated with salaries?
  4. The Price: A price hike may help you in dealing with the situation covering for the dip in profits.
  5. The Customer: From the customer point of view; an expanded customer base might be a good strategy. Techniques to retain customer and get more of them can be employed.

 

 

Hopefully, these pointers can give you some insight.

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