After closing a deal with big numbers, acquiring new customers or exploding in sales, the business suddenly grows and the costs of making that growth sustainable rise to another level. At this point the financial organization Currencies need to be prevented from spiraling out of control, profitability from being hit, and the surge from becoming a shot in the knee.
Increased variable costs can affect profitability
Not everyone is ready for this business expansion. “The main risk of growth is increasing the company’s debt. Many administrators use lines of financing to enable business growth and do not analyze whether the cost of this financing is reflected in the selling price of their products,” explains Vicente Sevilha, Director of Seville adviceand author of the book successful entrepreneurship (Publisher Brasport).
To understand how the growth of the company -almost unanimous ambition of entrepreneurs- can be a double-edged sword, it is necessary to explain some simple concepts:
If you talk about it benefitsome people confuse it with cost effectiveness. Understanding this difference is a crucial aspect to understand the process as a whole: profitability measures the monthly profit in relation to the total investment. So if you earn R$2,000 a month from a company in which you have invested R$80,000, cost effectiveness It will be 2.5% per month.
The profit shows the percent of revenue earned from sales made. For micro and small businesses, this value is ideally between 5% and 10% of turnover. To calculate this ratio, you need to divide the net profit value by the sales value. If you sell R$ 40,000 per month with a profit of R$ 2,000, your profit is 5%.
These are costs that the company will have regardless of its productivity. That operating and infrastructure costs make up the fixed costs: rent, InternetCleaning, maintenance, surveillance, water, gas and electricity are examples of these types of expenses.
are costs combined with productivity the company. Expenditure on raw materials, inputs and overtime that increase as production increases.
It is therefore clear why rapid growth can hurt profitability: as variable costs increase due to the increased production required by growth, it can become cash-strapped as the business needs to purchase inventory and merchandise to later sell. Often payment for purchases does not match payment for sales, causing a diamond in cash flow and affecting win rate.
How to ensure profitability during growth
In order not to see the profit margin decrease during the expansion and the company not to get into the red, it is necessary Negotiate and set deadlinesif it is possible, customer costs. “Ideally, each company has a price for cash sales and a different price for installment sales, because in the latter case you have to pay the cost of financing the process,” says Sevilha.
In some cases it can be recommended resort in any way accounting or business consulting, especially when market situations are difficult to predict. Other tips are:
- financial reserve to pay for fluctuations in cash flow. Saving for the unexpected is always a good idea.
- collaboration with suppliersExtension of the payment period for purchases
- Small deadlines to maintain sales value. It offers benefits for cash payers and is considering requiring “delivery” from installment buyers.
- advance planning and simulation different scenarios so as not to be surprised.