By Bigg Success Staff
Bigg Success in Business
When business owners talk about growth, they usually talk about sales growth. While it is important to look at the growth of the top-line, it’s even more important that the bottom-line increases.
Sales growth doesn’t necessarily lead to profit growth. The reason is that sales growth may be "good", "bad", or even “ugly”.
"Good" growth can be defined as an increase in sales that also increases profits. You really want to see profits rising at a higher rate than the percentage increase in sales. That shows that you’re controlling your costs well and achieving economies of scale.
"Bad" growth happens when an increase in sales leads to a decrease in profits. How can that be? If it costs more to produce each additional sale, profits will decline.
Seems obvious, doesn't it? However, in practice, a lot of managers get so focused on making sales that they fail to consider the costs of those sales. You have to determine whether your organization just isn’t controlling costs well at this new level or if you’re reaching diseconomies of scale.
"Ugly" growth is growth at a rate that exceeds the financial resources of the business. It may even be "good" growth, but the financial resources of the business may be depleted before that becomes apparent. Growth consumes capital, because assets such as your receivables and your inventories have to increase to support that growth.
Growing sales is the only way to grow profits in the long run. So you should concentrate on growing sales – the right way. Keep profit margins at the top of your mind, but remember that all of your bills are paid with dollars!