Will Growing Your Company Actually Increase Profits?

On Esta Klatzkin’s small business financial blog, a small business owner says that though he adds more people and equipment he isn’t increasing his net profit. He asks, “What am I doing wrong?”

If you’re an owner-operator who’s been working harder, running more loads and/or bringing on a new driver, that question may have been floating around in your head as well. Why isn’t the extra work showing up as additional income?

The Risk of Growth for Growth’s Sake

Klatzkin, a tax and financial consultant who specializes in providing tax accounting and financial services to owner-operators and other drivers in the transportation industry, explains that when a typical company grows, expenses increase as well which may absorb any profit.

For example, take a company that nets $50,000 on total sales of $1,000,000. That means the company is producing a 5% net profit. After totaling pay for a load, deduct wages, fuel, maintenance, travel expenses, etc., and you have your net profit.

If this company has a 40% gross profit (on loads sold), a $100,000 increase in sales should add $40,000 to the bottom line. “I say ‘should,’” Klatzkin explains, “because the increase in sales may cause the need for more equipment, space, or inventory.” For an owner-operator, additional wear and tear on the vehicle, more nights on the road, hiring additional drivers, increased tax burden, slow-paying customers, etc., can also diminish the impact on profits.

Keeping More of What You Earn

Good record keeping, careful cash-flow management, tax planning, accurate financial data and preventive maintenance can help owner-operators enjoy more of the fruits of their labors. Another thing to consider, according to Klatzkin, is whether growth is really the best route to increased profits.

“Growth for growth’s sake can be financially unhealthy,” she says. “A better way to increase net profit might be to increase the gross profit on all or most of the items sold.” In other words, a 4% increase in rates would add $40,000 ($1,000,000 x 4%) to this company’s bottom line – if the price increase doesn’t cause a loss of customers.

That’s a big “if,” you may be thinking. Increasing rates is indeed a risk, but Klatzkin says to focus on the value you offer your customers. “Suppose a company sells a top quality product and provides excellent service,” she says. “These are major facts in the competitive world. If 30% of the current customers account for 70% of the total sales, they are probably dealing with the company for reasons other than just low prices.”

This points out the necessity of keeping good records. You have to be able to pinpoint if 70% of your sales are in fact coming from 30% of your customers.

It also points out the importance of providing good service which for some carriers is worth higher rates. “Sell these customers on the fact that a slight increase in prices is necessary to maintain the quality of product and service that they expect and deserve.” Klatzkin says. “Good customers would like the company to be around in the future and should appreciate and understand the need for increasing prices.”

Learn more about this topic by downloading Klatzkin’s e-book, Driven 4 Profits: An Owner/ Operator’s Guide to Keeping More of the Money You Earn.