To maximize your profitability, you must set priorities based on what drives dollars to the bottom line the quickest, writes Al Bates in Five Profit Drivers Critical to Growth. Bates says sales, fixed expenses, gross margin, inventory and accounts receivable are most important to improving financial results. But some are much better than others in driving growth to the bottom line.
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Many companies have in the past relied on sales growth to build profitability. Bates says that it is unrealistic to expect that increasing sales alone will help you reach your goal. And, keep in mind that growing too fast can actually be worse than growing too slow. Bates writes that it can drain a company’s capital, beat up employees (especially these days when employees are already stretched) and strain relationships with customers and suppliers.
Sales growth can also come at a cost as gross margin percentages decline, as Bates found in his analysis of financial trends across sectors. This is because of a volume at any price mentality. Beware of this correlation between sales growth and gross margin deterioration; gross margin, Bates writes, is the most important driver of profitability.