A few years ago, I was taken aback when I learned that an acquaintance in Ohio, who had grown his company over the span of 25 years from $5 million in sales to $90 million, had gone out of business. The reason, as he explained, was that after years of organic growth, he decided to accelerate his expansion through acquisitions. Unfortunately, one of these acquisitions had significant financial issues that his team had not thoroughly researched. The result was a drain on his company's resources, leading to its eventual downfall.

It's crucial to note that even large public corporations with substantial resources are not immune to such missteps. The difference lies in their ability to absorb significant financial losses … a luxury that most small businesses can’t afford. A prime example is Microsoft's acquisition of Nokia for nearly $7 billion to compete with Apple and Android phones. The Lumia phone line, their new joint venture, failed to secure the necessary developer and carrier alliances, leading to a write-off of $7.6 billion in 2015. This resulted in thousands of layoffs at Nokia and the sale of the company for a fraction of its acquisition cost.

Growth can be exciting, but it’s essential to ensure it's contributing to your company's profitability, not hindering it. Do you have a solid business reason for an expansion plan (acquisitions, additional offices) backed by numbers and projections, or is it simply a matter of ego?

Likewise, even if you don’t have an aggressive expansion plan in place, are all the departments, units or offices of your company individually profitable?

The departments at a typical distributorship typically consist of sales, customer service/order entry, graphic design, marketing, accounting/finance, and inventory management/delivery. Let’s analyze some of these.

Sales: At what profit margins are orders sold? Do your sales reps typically sell at a “C” or lower, or try to stay in the “A” or “B” lane? Margins can also be boosted by guiding customers to higher-priced (and higher-impact) items, and order values can increase with suggestions for sensible add-ons.

Order Entry: How efficient is your order entry department? How many orders does each person enter in a day? You need to have a good grasp on these numbers.

Graphic Design: Do you charge appropriately for the design services your business offers? If you need to develop a time-consuming design – anything beyond simply a company logo – not charging or under-charging hurts your bottom line and sends a wrong message to your customers. It diminishes the value of your creative services, which hurts your profitability in the short and long run.

Accounting/Finance: Does your accounts receivable department have a collections problem? If yes, where does the problem lie: delay in submitting invoices, billing errors, errors not corrected quickly, no payment reminders? Not collecting as per the set terms can create havoc on your company's cash flow and make it hard to accept large new projects. Push your accounts payable department to secure payment terms better than industry standards.

Most entrepreneurs are so wrapped up in running the day-to-day business activities that they don’t take the time necessary to pull and analyze reports broken down by each unit, department and team member until it’s too late. I recommend doing this twice a month; if done regularly, it doesn’t take much time. This way, any issues can be handled promptly to get back on track.

In my distributorship, I had three graphic designers on my team. Overall, the revenue from this department was satisfactory. However, when I analyzed reports from each designer, I discovered that the numbers for one of them were consistently low. The issue was with this person’s self-confidence. She didn’t think she was doing much “creative work.” She always charged about half the amount she should have been. As the company owner/manager, you must closely monitor issues that could adversely affect your company’s profitability and handle them promptly.

Don’t be afraid to evaluate or re-evaluate your business units and departments. That’s something which is practiced by successful companies all over the globe. Late in 2022, the Wall Street Journal reported, “Amazon is undertaking a review of its unprofitable businesses, including the devices unit that houses voice assistant Alexa, to cut costs. Following a months-long review, Amazon has told employees in some unprofitable units to look for jobs elsewhere in the company while moving to redeploy staff from certain teams to more profitable areas and closing teams in areas such as robotics and retail.”

Cost-cutting measures are typically viewed as a sign that a company isn’t doing well. But more often than you realize, companies are being strategic in their resources to ensure profitability and long-term success.

Talking about business goals, revenue and profitability growth must be an inherent part of company meetings and conversations. Leadership designs the overall profitability strategy, but managers should be able to mold it into the unique workings of their departments. Flexibility in strategy implementation can provide the impetus for increased efficiencies, cost savings and enhanced synergies among team members and departments.

Leadership and managers must get each employee on board by making them feel like part of the profitability goal. Listen to their ideas; when team members feel their ideas are valued and they’re contributing to the company's success, it motivates them to perform at a higher level. That’s a win-win for all.