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The Solution is More Sales ... Right?

Written by: Rex Beach

Article Overview: In his book: "Shockproof! ~ Six Essentials for Business Success in Good and Bad Times", Dr. Rex Beach discussed the key qualities and skills needed to build a profitable business. In this article he focuses on "Sales" and the mystery that underlies a very curious fact – many companies that fail do so in the midst of increasing sales. A great marketing plan can be implemented perfectly and produce the desired results. But if management doesn't understand the consequences of rapid growth their success can contain the seeds of their demise. Learn the lessons you need to succeed – summarized in this article and explored more fully on the website: www.ShockproofTraining.com.

The Solution is More Sales ... Right?

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THE SOLUTION IS MORE SALES ... RIGHT?

- Is it fair to say that most of our efforts throughout any day or week are devoted to sales?

- And is it fair to say that a primary driver of business success is sales?

- And is it fair to say that sales have to exceed expenses for a business to make money?

- In addition, if it fair to say that expenses can be very difficult to reduce, especially in the shorter run?

- Therefore, is it fair to say that the solution to most business crises is expanded sales?

The answers are yes, yes, yes, yes, and no.

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SETTING THE STAGE

Let’s assume you own and manage a small civil engineering company, a Subchapter S corporation, that is marginally profitable and very short of cash. Exhibit I illustrates the key financial results for the past two years.

EXHIBIT I - SELECTED FINANCIAL RESULTS

2004 2005

Contract Revenues $3,131,021 $3,249,007
Profit Before Tax 46,965 47,760
Accounts Receivables 317,391 427,267
Accounts Payable 257,344 222,535

You’re faced with two options. You can continue as you have in the past, selling your services primarily to residential real estate developers. Or you can aggressively pursue business with the state transportation authorities where the prospects of rapid growth are considerable.

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THE HIGH GROWTH OPTION

Exhibit II reflects the hypothetical results one year later under the second option. Sales grew more than 25%, while profits grew almost as rapidly.

EXHIBIT II - SELECTED FINANCIAL RESULTS

2005 2006

Contract Revenues $3,249,007 $4,074,255
Profit Before Tax 47,760 59,031
Accounts Receivables 427,267 692,065
Accounts Payable 222,535 200,092

But now you’re in far worse shape. The state government pays very methodically, as you can see by the massive increase in receivables. That increase means your cash revenue has significantly slowed, which forces you to either a) borrow more from the bank or b) reach deeply into your own pocket to come up with the cash to pay operating expenses.

Further, as your accounts payable balance indicates, you’ve been compelled to pay your subcontractors more rapidly, since you need to assure their services to fulfill the new projects – another cash drain.

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WHAT DID WE MISS?

The answer to your profitability and cash flow problems may not be growth after all. In reexamining Exhibit I, note that you let your balance sheet management slip badly in 2005. In a period of virtually flat growth, your receivables increased by $109,876. That means your cash revenue in 2005 was not $3,249,007 but, rather, $3,139,131 (i.e., $3,249,007 – $109,876). In addition, your cash expenses were actually $34,809 greater than you reported in your income statement because you paid down your accounts payable by $34,809.

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OBSERVATIONS

Growth is rarely the answer to business problems – particularly growth at any cost. The real issues may lie with balance sheet management. Not as exciting as growth but frequently more important.

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Business Alert - For the Business Professional
(C) 2006 Shockproof! Training (by Rex Beach)
www.ShockproofTraining.com (phone 866.237.7228)

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