Revenue Versus Profits

During my last consultation, I had an interesting discussion with a business owner over the difference between high revenue and actual profit. He was under the impression that just because his business had consistently outstanding sales revenue that his business should be extremely profitable. He couldn’t understand why he was having trouble paying his bills and payroll for his employees.

I had to convince him that his sales weren’t where there was a problem. It was everything that was going on in the middle that was taking away from his profits. Somewhere he had operational breakdowns that were eating away at his incoming funds, preventing him from comfortably paying his operating expenses, and then leaving very little left over in the form of true profits.

The fact that he did have exemplary sales and revenue was probably the only reason why he was able to keep his doors open for business. Good sales are vital to a business’s longevity. Unfortunately, if the day-to-day operations are not efficient, all of the work put into generating sales revenue is easily rendered null and void.

Since we knew that he wasn’t having an issue with his sales, we started looking at some of the other possible causes for his profits to be eaten up. We started with his inventory. We looked at where he was spending his money and what he thought were the best and the worst selling products.

In one example, a particular vendor had been telling him that this particular brand was one of his best sellers. As such, the owner was putting in huge orders for the product. After taking a look at the actual sales and the actual on hand inventory, we realized that the sales did not justify the product he had on hand. In fact, based off of actual sales, there was 15 years worth of inventory. The vendor saw this business as an uninformed target and took advantage of it.

By eliminating this unnecessary inventory cost, the business owner was able to save several tens of thousands of dollars a year in lost profits.