Your Sales Are Increasing. But Are Your Profits?
Business is booming. Customers are coming through the door, orders are increasing, and your annual sales are higher than ever.
Sounds like a successful year, doesn't it?
Not necessarily.
One of the most common misconceptions in business ownership is that increasing revenue automatically means increasing profitability. Unfortunately, the two don't always move in the same direction.
And sometimes, the harder you work to grow your business, the less money you actually make.
When More Becomes Less
Consider two years in the life of a hypothetical business.
Year One | Year Two | |
Annual Revenue | $1,000,000 | $1,200,000 |
Operating Profit | $120,000 | $90,000 |
Operating Margin | 12% | 7.5% |
Revenue increased by 20%. That's an additional $200,000 in sales.
But operating profit actually declined by 25%.
How does that happen?
Perhaps the business hired additional employees to handle increased demand. Maybe supplier costs rose faster than selling prices. Perhaps additional advertising, overtime, delivery expenses, or equipment maintenance consumed the extra revenue.
Or maybe the owner simply underestimated what it would cost to generate those additional sales.
Whatever the reason, the business is now doing more work while earning less money.
The Number That Deserves More Attention
Revenue tells you how much business you're doing.
Profit tells you how much of that business you're actually keeping.
And profit margin helps you understand how efficiently you're converting sales into earnings.
In our example, the business went from keeping 12 cents in operating profit for every dollar of revenue to just 7.5 cents.
That's a significant deterioration, even though the top line looks impressive.
And the implications extend beyond today's bank balance.
When the time comes to sell, buyers generally look beyond revenue to examine earnings, operating expenses, sustainability, and the risks associated with generating those earnings.
A growing business with shrinking profitability may be less attractive than a smaller operation with stable margins and predictable cash flow.
Growth Should Have a Purpose
None of this means growth is undesirable.
Expansion can create tremendous opportunities. Additional revenue may help a business gain market share, improve purchasing power, or establish a stronger competitive position.
But growth should be evaluated in terms of what it actually accomplishes.
Before celebrating another record sales year, consider a few questions:
Are operating profits increasing alongside revenue?
Are expenses growing faster than sales?
Is the business generating sufficient cash to support its expansion?
Is the additional revenue creating lasting value—or simply additional responsibility?
The answers may reveal more about the health of your business than the sales figures alone.
Because at the end of the day, the goal isn't simply to build a bigger business. It's to build a better one.
Growth. Strategy. Acquisition. Exit.
Perspectives on Business & Property Ownership
Christian Gates
NYS Licensed Real Estate Salesperson
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