Profit Blog
Jarmo Manninen & Muutosdraiveri Oy
What is the growth illusion in developing a company's profitability?
A common misconception is that increasing a company's turnover always increases the company's profitability. This is not true. In order to generate a company's turnover, direct costs related to sales and indirect costs related to sales are needed. Unfortunately, these are often not separated from each other in a company's income statement. Why is it important to separate these costs, so the following is the answer to this question? Typically, companies monitor direct sales margin and think that it represents the company's sales margin. In this case, it is mistakenly thought that if direct sales margin is positive, then by increasing the company's sales, the company's profitability will increase. Indirect costs related to sales must also be included in the company's sales margin analysis, which are often very significant, even over 20% of the company's turnover. When indirect costs related to sales are also included in a company's sales margin analysis, sales margin can be negative. In such a situation, increasing sales will worsen the company's profitability and may lead to payment difficulties or even bankruptcy.
Another important question related to the company's profitability is: When is the company's operational business profitable? As mentioned above, both direct and indirect costs related to sales must be included in the analysis of the company's sales margin. If after this, the company's sales margin is lower than the sum of the company's fixed costs, loan repayments and loan servicing costs during the period under review, then the company's operational result before taxes is at a loss. It is worth noting that this analysis includes the company's loan repayments and not depreciation.
To summarize the above:
A COMPANY SHOULD ALWAYS AIM FOR PROFITABLE GROWTH AND NOT GROWTH AT THE COST OF UNPROFITABILITY.
Is your company's sales margin high enough?
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I have written four books on creating the conditions for financial management in a company, and they are available from well-stocked bookshops and online bookstores in Finland, for example from BoD (Books On Demand) at:
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