How to avoid increasing sales but lower profit margins

It was interesting today to read that Dominos Pizza are reporting an increase in sales but lower profits. This is a surprisingly common feature of companies who chase top line growth.

What things then can you do to ensure that that Increased profits follow increased sales:

 

1: Forecast for all eventualities.

Profit margins are often hit by not fully forecasting the cost and impact of driving for harder sales. Carrying out scenario analysis will further help you to project final profits. Be clear on where additional resultant costs will land and when these will happen.

 

2: Measure the ‘step change’ points for your business.

Ensure that you understand where pushing sales above a certain volume point will cause a step change in costs. This is acceptable where it is short term but if you believe you are going to hit this point, ensure you have a plan to be able to push past this point in the longer term so that  profitability is maintained. E.g investment in larger pieces of machinery which need to be fully utilised at full capacity. Idle resources which cannot be flexed on a unit by unit basis will add disproportionately to your bottom line.

 

3: Ensure you understand the impact of increased sales on your pricing.

If in order to increase your volume of sales units requires a reduction in price, this again may impact on your overall profitability. Always do the maths and ensure that increased volume translates to increased profit and more importantly, increased profit margin, otherwise you could end up simply running harder to get the same result.

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