Are Your Revenues Creating a False Sense of Profitability?
Nov 09, 2021
Unlike revenues, profitability can be a tricky metric for business owners. Growing your profitability is generally – and ideally – a long-term goal but unprofitability has a way of hiding in short-term numbers.
If you’re not looking at the right slice of data and including enough big picture context, it’s easy to see profitability where it doesn’t really exist. Short-term revenue increases can lead to long-term decisions that aren’t really supported by the underlying profitability data.
A common example is a decision to make an investment in the future growth of your company when revenues are rising.
It’s a tempting and seemingly intuitive course of action. After all, you don’t grow your business by keeping things stagnant. Reinvesting revenues into new hires, upgrading equipment, opening new locations, or adding product lines are often solid strategies for growing a business – but not when underlying profitability do not support these investments.
Is Your Business in Position to Invest in Growth?
Here are three issues that are often overlooked that can hurt your profitability:
Is there a long-term goal behind your investment plans?
Pursuing growth for the sake of growth can leave you with blind spots. We recommend that you invest your time and resources in identifying your long-term goals before committing resources to future growth and avoid investments that don’t advance your long-term goals.
Are you experiencing unsustainable revenue growth?
Without a clear picture of overhead cost trends, you can be in the situation where your revenues are growing, but profitability is not. If you’re overly focused on revenues, you may be missing a lot of unjustifiably growing expenses, like overstaffing. If overhead is increasing at the same rate as revenues, profitability remains stagnant as you grow.
Are your accounting metrics overly focused on revenues?
It’s a common mistake and revenues are easier to grow than profits. An effective profitability analysis is all about the details. The answers are often to be found in the weeds:
- Are the terms of your lease locking you into unprofitable occupancy costs?
- Do you have too many administrators on staff?
- Are there subcontracting opportunities that make more financial sense?
- Has your pricing kept up with the actual cost of production?
- What trends can be identified by looking at your margins?
- Do you understand profitability by client or business group to avoid being blindsided by what is unprofitable?
How to Determine What Your Profitability Is Telling You
Not all sources of revenue growth are equal when it comes to assessing the true profitability of a company or a product line. And not all investments in your growth lead to ongoing profitability.
That’s one of the key reasons why Kirsch CPA Group’s business advisory services go far beyond the balance sheet to take into account the specific needs and goals of your business. When it comes to profitability, a cookie cutter approach won’t get you where you need to go.
Our profitability assessment goes deeper to provide the insights you need to craft strategies that don’t fall for short-term numbers and data that isn’t organized to provide the answers you need. Those are profitability traps.
Let us show you how to measure and drive genuine profitability by focusing on opportunities to reduce costs, improve efficiency and increase revenue opportunities starting with a complimentary profitability assessment.
Contact us to learn more about understanding your profitability
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