Analysing Income Statements
Income Statement Problems
Profitability is one of the most important goals of any enterprise. Profits provide the shareholders and owners a return on investment and allow the company to grow using internally generated funds in the form of retained earnings. Profits are not the only objective of businesses today but without profits, a company cannot survive in the long run. There are several growth strategies that can result in disappointing results.
1. Using price to grow
One common strategy used to increase revenue is price-cutting to sell more products or services. The focus on revenue growth can often be misleading. In fact in any product with a variable cost of goods sold and a continually downward sloping demand curve, pricing to optimize revenue cannot optimize profit. The problem is that the increases in revenue may not offset changes in overheads or the risk involved in increasing the accounts receivable.
Things to consider before changing prices for growth
- Before touching your prices, calculate the volume increase required to offset the price cut required.
- If you intend this to be a temporary price cut, will the customers accept the price increase when it comes?
- Where is the customer price sensitive in decision-making? Often it is near the beginning of the decision-making process. Sometimes price cuts can be recovered in the extra sales by tactics such as selling options, parts and add-on sales.
2. Adding outlets
Running a business and running a chain of businesses are very different matters. For many businesses, adding outlets and forming a chain of businesses can be very successful.
Things to consider before adding outlets
- Develop a strong outlet management program. Just because somebody has been around a long time doesn’t mean that they should necessarily become “manager” of the next outlet.
- Set high minimum profit expectations for new outlets.
- Each new outlet should be treated as a new business.
- Develop a chain management plan. If the owner is the manager, then you must begin to move your own position from outlet manager to chain manager.
3. Expanding geographically
Adding a new geographic target market can be an excellent way to improve sales, however there are costs associated with dealing at a distance, which can really add up.
Things to consider when expanding geographically
- Determine your business objectives. Is the new market just a way to increase revenue, or are you going to eventually set up a satellite office or plant in this market? Treat the new geography as a new business start-up and do a complete costing with respect to the addition of the new market.
- Have goals and objectives with tight timelines. Know when to push forward, hold back or even retreat from that market. Taking too long to establish the market can be very costly in terms of profit and in terms of cash flow.
- Make sure you are running well locally before expanding your market within geography.
4. Expanding your product line
Adding products, especially those quite different from the competency of the company, can create huge profit opportunities for a business. They can also create problems if the company has not done its homework with respect to adding the new product.
© 2009 "Start Small, Grow Big" Barbara Mowat and Ted James, with the contribution of William Erichson on Chapter 6, "Financing A Growing Business". All rights reserved. Reproduced with permission. No part of this work may be reproduced, distributed, amended, modified, edited, transmitted in any form, or translated in any way without the prior written permission of the copyright owners. www.ImpactCommunicationsLtd.com.