What goes up does not come down

But it does relate to revenue and profit

What goes up does come down. At least that is true for most things; a baseball thrown or a bottle rocket that has been ignited. It still is not true for some satellites launched or a helium balloon that has been let loose.

And, it is not true for your business. What goes up does not come down. Visiting with a couple of owners yesterday, the presentation I gave was about maximizing the efforts of an owner and that of employees. One of the owners told of how he had greatly reduced the number of employees and found that more money was going to the bottom line of the profit and loss statement.

There is not necessarily a connection in the top line and the bottom line of your profit and loss statement. Just because the number on the top line of your profit and loss statement – sales, income or revenue - increases, this does not mean the bottom line - net profit – is also going to increase. This correlation can be true for employees, as it was for the owner in this article, as well as it can be true because of your gross margin and all the expenses your business has.

With most every business that grows, there are expenses that are going to increase. Personnel is often the first one that increases, but when there is a downturn in sales, how many businesses have established exactly what percentage of sales is to be spent on payroll? Unfortunately many find their payroll is out of line when a “percentage of sales” is not established and adhered to.

Another big area of concern is that of inventory. If a business owner is not carefully monitoring their inventory turn rate, at cost or retail, there can be two situations occurring and neither is good. With the inventory turn rate increasing, there is a possibility of loss sales because there is not enough inventory on the shelves to meet customer demands. This will lead to a sales decrease because customers are not finding what they want or are not willing to wait until you get the next order on your shelves.

The second situation is that of inventory turn decreasing because sales and inventory on hand are getting out of sync. The profitability is quickly and drastically going to be affected when the inventory turn rate slides downward.

There is also the concern of any and all operating expenses. Look at it from your own personal experience. Select the domination of money in your pocket that is larger than what you normally carry with you. You will know it is there because it is unusual. However, when you use it to pay for something and receive multiple smaller bills for change, you will struggle to remember just how many of each you have on hand. Try to remember at the end of the day where you spent all of the money and you are challenged, if not unable, to do so.

Expenses in your business work in much the same way. When revenue increases, the various expenses often get overlooked. When instead, it would be far easier to make more of those sales fall to the bottom line by keeping a close watch on expenses.

Margins also work the same way. Too many businesses adopt the chain store mentality of “we will make it up on volume” and allow their margins to slowly slip downward.

To that point, there is a free online calculator at the ProfitsPlus.org website which will allow you to do a multi-year analysis of your profit and loss statement.

You can compare the three past full years to this year to date to see how well your business is doing, and how good of a job you are doing at overseeing everything.

The person who inspired this story learned the lesson the hard way; over several years and with profits that did not stay in his pocket. We can learn in two ways; from our own hard experience or from the experiences of others.

What goes up does not always come down.

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