To increase profits, it is not necessary to expand. Tying the motivation of sales managers to revenue is dangerous for businesses. And sales growth can actually eat up everything you’ve earned. If you or your business has financial problems, you can always contact loans app and solve your problems. So, what are the financial traps for your business?
Sales Growth = Revenue Growth = Profit Growth
Profit does not always rise with sales volume. On the contrary, he is able to eat it. Do not get carried away with competitive games, so as not to take the company in the direction of lower profitability. Another way that entrepreneurs resort to increasing sales is to provide installments. If such a situation has already developed, I recommend collecting receivables – this is the name of everything that is owed to the business. In practice, this quality is forgotten in practice.
Motivate employees only from revenue
Another system of motivation from revenue does not take into account the key indicators of a particular business (those whose changes increase or decrease profits several times). For a sales manager, this may be the conversion of exposed commercial offers into payments. It demonstrates the ability of a particular salesperson to “squeeze” the client.
The financial model is a table that shows how all management decisions affect the financial result. It also demonstrates which indicators affect profits, and which employees influence these indicators. With its help, it becomes clear who and how to motivate.
Business expansion = more profit
Follow not only the growth of revenue but also the profitability of the business – the ratio of invested money to net profit. We recommend tracking two more important indicators: Revenue per employee and Net profit per employee. Define a rate threshold on these metrics to drive hiring. If they are below this threshold, increase motivation, replace someone or reduce staff.
Don’t rely on expansion as a lifesaver. If the business is problematic, the owner scales the difficulties along with it. First figure out what is wrong with the company, fix the situation and then expand. And this step also requires resources. It is impossible to finance the opening of a new direction from the turnover. There should be a business development fund, which is formed from net profit. So you can direct money for expansion without damaging the existing business.
Focus on the process and forget about the outcome
Equity is the difference between assets and liabilities. Assets are everything a business has: money, vehicles, equipment, real estate, and receivables. Liabilities include debts on credits and loans, suppliers, customers, and the state. Information about them is contained in the balance sheet section on liabilities. Usually, the return on equity is calculated at the end of the year. Therefore, data on assets and liabilities are taken as of 31 December.
Mix personal money with business funds
Individual entrepreneurs and individual entrepreneurs especially suffer from the problem of mixing their own money with business funds. It is easier for legal entities – the law requires them to separate personal finances and the money of their company. And even in this case, spending from the company’s account for personal needs, and for the needs of the business – from one’s own pocket is not ruled out. And then it is difficult to figure out who owes whom and where the money went.