“He’s done it wrong! He’s done it wrong! I made a lot more profits I am sure!” John kept telling me during our meeting.
His sales revenue increased 41% compared to last year, while the profit went down 28%. He was positive his accountant reported wrong profit figures.
I reviewed the profit and loss statement, compared it with back-end transactions but everything was correct! It was so correct but very difficult for John to accept it! How can he be selling so much more and end up losing his profits???
Well…here is what happened….
John runs a successful bakery with 4 branches in Sydney. Last year he teamed up with a business development company that secured for him supply contracts for 5 major hypermarkets customers. For John this was “the dream deal” he was looking for.
The business development company charged John 7% commission on the hypermarkets new business for the year. The supply contracts were agreed on 25% retail price discount looking at the bulk quantity they committed to buy from John’s Bakery every year.
To cater for the new supply requirements, John had to hire many new staff, expanded his central bakery by leasing additional 85 sqm baking space and bought new baking machines for a total of $91,000.
The end result was that the incremental revenue generated did not cover the new fixed cost incurred and this deal was only a loss making contract. I tried so hard explaining to John that his new lease, depreciation and staff cost was in total higher than what his discounted price mark-up can cover. To add to the misery, the new baking space, staff and machines have almost 40% idle capacity that he is not using though paying for it.
John was in shock, couldn’t absorb that all his efforts ended up in a loss. He finally said “ I will call you later to see what I can do to fix it!” and left my office.
Monitoring how well your sales are growing is never enough. Each business has a capacity and a limit to how much sales they can absorb. Once you stretch this capacity, unless you efficiently use all of it and work on smart prices you will start losing your profits in no time.
As a Virtual CFO we identify for our clients how much sales they can take without increasing their fixed cost. We evaluate each business opportunity based on its profit impact and help them make informed decisions.
If you are business owner or an entrepreneur looking to grow your business with steady and stable steps, let’s have a chat and we can help you achieve it.
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