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What You Really Need to Know About Changes in Profitability

It’s time to say goodbye to 2020!  It’s a new day and a new year. If COVID taught you anything, it’s that when a business is in crisis mode, it often goes undetected for a while. Through no fault of their own, many business owners either lost control or felt out of control when money flows started going the wrong way.

In a recession, it’s very easy to have a business that spends more money than it brings in. It was a confusing, frustrating, and overwhelming time for many business owners.

The immediate pain for those business owners was:

  1. A lack of cash caused by a decline in revenue and
  2. A lack of decline in expenses to correspond with the revenue decline

It broke my heart to see this play out in many businesses and the emotional pain it created. If cash is king, then profitability is queen and the decline in revenue with no decline in expenses created losses that had to be funded. 

Businesses became fat almost overnight. Owners struggled to make payroll. Without PPP loans, many would’ve gone out of business. Many businesses weren’t growing as fast as they had in the past. If business owners weren’t tracking their changes in profitability, it was likely to go unchecked. The future outcome of that is a business in crisis, forced to fund losses with borrowed money. Borrowing magnifies gains, but it also magnifies losses too. Businesses have to pay back debt with future dollars that company is not generating in the present. Debt in a declining business is like pouring gasoline on a fire. It’s an accelerant.

However, I saw many businesses that weathered COVID quite nicely and actually had increased revenue and profitability. Increases in profitability create excess cash, which can be reinvested in the business if you’re a growth company or distributed to shareholders if you’re an income company. If you’re a growth company, a recession is a great time to invest in good people who’ve been laid off, explore new products, add locations or new markets, acquire a company or pay down debt. These investments of cash should produce a return to the company and position the company to increase revenue and profitability even further.

Believe it or not, too much cash on your balance sheet could be an issue. If you’re stockpiling cash and it sits idle in the bank earning an incredibly low return, you may be missing opportunities like the ones mentioned.

To detect what changes in profitability you need a scorecard and to make a commitment to monitor it monthly. You can’t manage what you don’t measure. So, check your profitability in $ and % of revenue. Not checking changes can create issues that are left undetected.

It’s a new year and it’s time you started doing something to track your profitability. Don’t hold back. Start today!

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