Rightsizing Your Business For Success

We are led to believe that success and profit is predicated on the growth of your business. The more units, parts, accessories and service you sell the more profitable you will be. We certainly know that a healthy economy is reliant on a certain level of growth in GDP and employment. But is that true for business?

Far be it for me to say that an increase in sales is not important to your business, but is it always a profitable solution? It is my theory that in the Motorsports and Marine industry there are break points in sales volume that can dictate the difference between profit and loss.

Have you ever got to the end of a fiscal year and wondered why your profit is down when you had a 10% increase in sales? It's what I call "Rightsizing". With almost every increase in sales there are corresponding increases in expense. To increase sales you may have to increase the level of your inventory and the dreaded addition of staff to maintain service levels.

These two factors alone can outweigh any benefits you may realize from an increase in sales if not managed carefully. So how do you know what the right size is for your business to maximize profit? It is actually fairly easy, but takes some careful planning.

Let's first look at an example of a company with a $2,300,000 sales volume. At this level of sales, the owner can operate with one parts person, one sales person, 2 mechanics and a part-time bookkeeper. The owner can effectively operate the business with 5 permanent and 1 part time staff, including himself, and make a 5% net profit each year. If we assume the market allows for an increase in sales to $3,000,000, the owner will have to add a service manager, sales person, full time bookkeeper and one additional parts person. Coupled with the additional staff is a 15% increase in carryover inventory plus related expenses for storage, freight and delivery etc. Let's just say these additional costs account for an increase of $150,000 in expense. The additional $700,000 in sales volume will generate an increase of $91,000 revenue based on a 13% gross margin.

Well, you do the math – we just lost $59,000 dollars based on an increase of $700,000 in sales. I think it is evident from this example that there are break points in profit, that an increase in sales will generate versus the additional expenses that are associated with the sales volume.

If you are anticipating a growth in your business through expansion, additional product lines, new local industry or simply a favourable market projection, you need to prepare a business plan that will demonstrate your profitability under the new sales conditions.

Your business plan should take into account the following steps

  1. Analyze your last 5 fiscal years financial data to establish your optimum sales volume for profitability
  2. Establish a sales projection for the next year based on the new parameters that will substantiate a sales increase
  3. Establish your gross margin for your overall sales volume.
  4. Establish the cost of any addition staff you will require to service the increase in sales
  5. Estimate optimum inventory levels required to service your sales forecast and factor in any potential increase in carryover and related floor plan interest expense.
  6. Consider any additional expenses your business will incur to operate at the new sales level.

Now run the numbers and see if the increase in sales will pay dividends in profit. You may just find that the increase in sales can be accomplished without any significant increase in expense. However, you may find that you will need double the sales increase to make it profitable.

This exercise is not just reserved for an anticipated sales increase in the next fiscal year. It is a very effective process to employ to establish your optimum sales volume. In any planning process, you first want to set your profit goals and then work from there to forecast your sales, margins and expenses.

If you need help with Rightsizing your business, contact me for a free tele consult.

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