Plenty of business owners will increase their turnover this year and yet their profit will shrink. They might even make a loss.
Yes there are a whole bunch of reasons why this might be the case.
BUT sometimes the business will simply focus too much on increasing revenue, without keeping an eye on profitability.
Which reminds me of the Profit First basics of financial management, adopted by many start-ups and SMEs, which was made popular by Mike Michalowicz.
The purpose being to increase profitability and remain viable long-term, by reverse engineering the profitablity…
> Profit should be the top priority in the company’s financial plan. One of the key principles is to always prioritise profits over other expenses.
> Segregation of business accounts into different buckets, including profits, operating expenses, taxes, and owner compensation. This makes it easier to track and monitor the finances, so that sufficient funds are always available for profits and other key expenses.
> Strict spending limits for each account, especially the operating expenses account. This prevents overspending and forces owners to find creative ways to cut operating costs and increase margins.
> If a business is consistently overspending, make regular adjustments to spending limits to ensure profitability is maintained. The ultimate goal is to increase profitability by focusing on growing revenue and reducing expenses. Sounds obvious, but not always executed..