Increasing revenue is how you grow your business. Whether it’s finding that next customer, project, or product line, selling more usually equates to business growth. We often focus so much on finding that next sale, we sometimes overlook the incremental cost of landing that business. Good discipline in analyzing your sales channel maintenance and gross margin for each transaction will help you understand if you are generating revenue at all costs.
Some things to think about:
- In General, Revenue Growth is Good – If you land incremental business at your current gross margins, your business will grow successfully. If your current business infrastructure can handle the extra business, you have already met your fixed costs; therefore, the incremental margin will drop to the bottom line. If you need to concede some of the gross margin to successfully land the business, you can still be profitable.
- Landing Large Customers – Can your business absorb the additional activity? If you have to hire additional employees or build up additional inventory, there is an element of working capital that needs to be managed. Your new relationship may require adding or expanding your production capability. These are costs that need to be assessed and monitored as your new relationship develops. They have a direct impact on the profitability of your business and can dramatically affect your liquidity. Always understand your incremental expense requirements and their impact on your cash flow when negotiating or proposing new deals. If you identify these issues up front, your banker can be your best friend working through the details.
- What Are Your Hidden Costs? – Sometimes new customer relationships come with lots of hidden costs. Some of these things may be in the form of:
- Unlimited return policies
- Extended payment terms
- Quarterly or annual volume rebates
- Co-op advertising requirements
- Shipping disputes or short payments
These are all issues that can affect the profitability of your new relationship. You must understand these costs up front, because it is very difficult to change them down the line. If you have considered the costs of these issues and managed them appropriately, you can still successfully manage the profitability of your new customer.
- Is Your New Customer Committed to You? – If your current infrastructure can manage the business, this is a non-issue. But if your new customer requires you to hire people, buy capital equipment and carry additional inventory, you want to make sure your new relationship is solid. This includes commitments for additional volumes in the future at your agreed upon price. I have seen small businesses make the financial commitment to support new relationships, only to have the prices cut after a few months. Make sure your agreements are understood and in writing.
We spend a lot of time working on growing our businesses. Most business growth is the result of a lot of hard work, building your relationships over several years, and understanding your market to meet emerging product demands. When the opportunity emerges to acquire a significant piece of business, make sure you analyze all the requirements and expectations. As long as you can prove you are not selling at all costs, these deals can make your business successful.