Sales Up, Profits Down: A Common Theme In Today’s Business

Sep 21 2011

After reviewing my year to date financials of my business I can sum it up pretty easily. Sales up, profit down.  And it’s not just me.  It’s becoming a common thing is this economy because of variety of reasons that I see.  I realize it’s fun to read about all these new start-ups and newly funded ventures and dream of being the next quick millionaire but the reality is that it’s not that simple.  You can go to idea camps, brainstorm for 36 hours straight, and even get funding,  but for most of the world it’s going to be a slow developing, gradually building business, built on revenue being greater than your costs.  So you can buy that great domain but if you want to start a business behind it you better be prepared for the following challenges.

Insurance Costs: You constantly hear people bitching about them here in the US and for good reason.  I hear Obama is going to save us all but in the meantime the cost of a fully insured woman is around $300 a month. A male $200.  Most companies have dropped dental and eye despite it not being that much more.  And that’s just health insurance.  There is also liability, vehicle, building and property.  Even for this blog I have to carry insurance just in case somebody sues me.  These add up and add up quickly.  Our company has reevaluated the insurance value of some of our building to reflect the true cost of replacement.  It’s not like we were overstating anything but it makes sense to check your policy to see if the replacement value of your assets are really their value.

Raises: Employees want them.  It was easy to make excuses as to why you didn’t give them the last few years but at some point you have to give them to employees that are increasing productivity and taking on more responsibility.  It’s hard to have a meeting explaining the rise in costs and not give raises.  Those costs are increasing for your employees at home as well.  Their food bills has most likely increased dramatically over the last year as has their transportation costs and other expenses.  And you hate to lose a fully trained, experienced employee for 5-6% raise.  The year after those raises you instantly have to make up a 5% increase in payroll.

Lack of Ability to Get Operating Capital: Techcrunch makes it seem like they are throwing money around but unless you hold real assets the banks are not going to give you money anymore.  Five years ago getting an operating loan or expanding it was simple.  Show a solid balance sheet and you had it.  Not anymore.  They want assets that can be sold if you can’t pay.  Once those are fully borrowed against you’re done.  I would say half of the businesses you see going under didn’t go out directly because they were bankrupt.  Many very well could have weathered the storm.  They just couldn’t find a bank to give them money to weather another year.  They don’t want to take the risk that you won’t make it.  It’s become a great place to buy up a business facing those cash flow issues.  A good business but one that didn’t adjust to the new economy.  A little cash and a little structural change and they can be turned into a nice little profit center.

Input cost: Raw materials are through the roof.  All commodities have gone crazy. Grains, metal, gas and fuel. Up.  My trucks from Oregon went from $3K to $5500K this year.  That obviously effects the profit margins.  You say raise the price.  But…..

Customers Won’t Accept Price Increases. The coupon economy that we are facing is forcing businesses to keep pricing down.  What we businesses are doing is merely shrinking the amount of product you are getting in a package or deal so you think the prices aren’t increasing.  Look how much yogurt is in your cup. Or cereal in your box.  Yep, they’ve been reduced.  Same shape, just scaled down so you barely notice.  That’s why they put the price per ounce on the shelves to try and help you but people use that to compare product to product not product now vs in the spring.  Me, I bring a plant to market a few months before I did the last few years.  Healthy plant but just a few months less growing than in years past. That or I’ll move it down in pot size.  Most people won’t notice the difference in a 3 gallon and a 5 gallon plant as long as they aren’t right next to each other.   It also doesn’t help that there is always one business willing to lose money in order to gain customers.  They are usually the first to fail but the customers just come back to you but with new price expectations.

Splintered Advertising:  We are in a transition period of media. There are still the baby boomers that tend to use old media.  Then there’s the younger that mostly use new.  That leaves the rest using both.  Cable television shows are doing very well but so are streaming and every DVRs for later viewing.  It has become challenging to figure out how and where to spend your advertising budget. You can blow a ton of money chasing.  I feel I have a pretty good grasp and have actually lowered our costs but I think that’s because we’ve dropped $10,000 or more by dropping the phonebook and creating our own online strategy.

So go ahead and buy that name on Namejet.  Just don’t pretend you’re going to build a real business on it. While it is certainly doable and many people have, you just need to keep in mind it is going to take a lot of money and a lot of time.  The name is just a small part of the plan.  Online has a lower barrier to entry and one man can build a million dollar business but he too will face the challenges above at some time. Make sure you’re prepared to do the same.

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Outsmarting the Dumb, Outworking the Smart

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1 comment

  1. peter h

    Great advice Shane. The internet might have allowed for an easier entry into many markets, but, it won’t mean diddly if one forgets about the items you have pointed out. You have done a great many people a huge service with this article.


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