Understanding Profitability: Tips for Keeping Your Business on Track

Profitability Increasing year over year

I often hear a common question from my clients: "What is the right profitability rate, and what are the industry standards?" This is a crucial topic because knowing and monitoring these metrics can make a big difference in your business's success.

First and foremost, if you notice your expenses are increasing as a percentage of sales, it's essential to understand why this is happening. Sometimes, these increases are due to strategic decisions, like hiring a consultant or adding a senior staff member to your team to accelerate growth or launch a new initiative. These are educated risks that can lead to long-term success, as long as you manage these costs effectively and have the means to support them.

However, if your costs are rising significantly beyond your control, it's time to take action. While you can't change the fact that advertising costs on platforms like Google, Amazon, TikTok, Instagram, and Facebook are higher, you can optimize your spending. Look for ways to do more with less and consider whether there are other expenses you can manage more intelligently.

The key takeaway is this: companies should constantly review their top 50% of costs and act proactively to improve their bottom line. Keeping a close eye on these expenses and making strategic adjustments can help ensure your business remains profitable and competitive.

Below you can see two different scenarios; the company on the left, A, has increasing costs in dollars w/o increase in spending as a % of sales vs the one on the right, B, has increasing costs in dollars and as a % of sales. While the first company's cost increase is mostly in variable costs as revenue increased, the second company requires some attention as cost increase rate is greater than revenue increase rate.

So, stay vigilant, be smart about your spending, and always look for opportunities to optimize. Your profitability depends on it!

Profit and Loss Statement of Two Companies