Sales are Up, Profits are Down—But Why?

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Howard Scott |

Poor statement of performance could be serious call of alarm

PEMBROKE, Mass. — Your Laundromat had a good year. Sales rose 4%. Excellent. Nice and steady. But when your accountant delivers the results, profits are down 10%. What happened?

Of course, the 10% reduction is only on paper. That’s what the accountant does, calculate profit. You drew your full salary, so it doesn’t matter that profits are down. In fact, because profits are down, you pay less in taxes. So it is all good, right? Wrong! It’s not good news.

Profits are more than an accounting entry in a ledger. They are a statement of your performance. If profits are down, it means you did not do as well as last year. If sales were up, but profits are down, that’s a serious call of alarm. Why didn’t profits move up with sales? Where did you lose control of costs? This is what you must figure out.

If you just let it go, and the next year, it’s the same story, by year three, there will be trouble. Your accountant will tell you that you can’t continue to draw your full salary, you will have to draw $5,000 less. That’s when you’ll begin to pay attention, but it might be too late.

Revenue needs to increase at least slightly to maintain profit. Costs go up 1% or 2% each year, so revenue must keep pace. But increasing sales is also the sign of forward motion, of progress, just like decreasing sales is a sign of decline. So if revenue went from $250,000 to $260,000, but profit went from $50,000 to $48,500, it is not a good trend.

To those that argue that the difference is not such a big deal, I am reminded of the statement by Charles Dickens in Great Expectations:

“Annual income: 20 pounds. Annual expense: 19 pounds and 6 shillings. Result: happiness.

“Annual income: 20 pounds. Annual expense: 20 pounds and 6 shillings. Result: misery.”

Small sums matter. And trends point to what will be in the future.

The question is: Why were profits down?

Have costs crept up more than expected? Has your town imposed a tax on utilities which has pushed up water and electricity to more than 25% of total expenses?

Have you put out money for a capital project that ran past schedule? Have you had a lot of staffer turnover, resulting in the need for much more rehiring and training? Has a rent escalation charge pushed your occupancy costs over budget? Did you need to take extra money, raising management costs excessively?

Analyze your expenses to see where costs went up. Were the increases necessary? Could they have been postponed? Why were they undertaken at this time?

Perhaps costs rose because of accounting practices. Say you remodeled your store, and your accountant took a large Section 179 expense right off the top to lower your tax liability. The money spent for this effort will be reaped in future years, while an overwhelming percentage of the expense was taken in the year of installation. If this were the case, the reason for lower profits is not due to poor management, but rather because of an accounting determination.

Perhaps you had lower profits because you did not increase prices. If costs rose, maybe you should have raised prices. Yes, it is tough to raise prices—customers complain, you’ll lose some regulars, there’s confusion on the floor—but matching prices to costs is pivotally important to achieving the target profit.

It is not unreasonable to raise prices once a year, or perhaps every other year. But it is necessary to make sure the price increases cover cost increases plus normal profit margin. In other words, if costs go up 2%, prices need to rise by 2% plus some assessment of profit. In this example, prices should go up by 2.4% at a minimum.

Lower profits may have been realized because, even though overall revenue increased, the mix of sales changed. Lower-margin volume went up while higher-volume trade went down. For example, commercial volume went up 15% while in-store volume went down 5%. Because commercial volume is at a lower margin, overall profits are down. It helps to know this. This information forces you to act.

Start by asking questions. Why did retail store sales go down? Has a new Laundromat opened down the street? Is there a steady repositioning of your market area, where more apartment dwellers are leaving?

Have you had less staffing on-hand to help customers with their problems? If commercial volume is increasing, can you make it more profitable? Is it time to raise commercial prices? (It is always smart to raise prices when business is good.)

Could you eliminate smaller, less profitable accounts, and concentrate on the larger accounts? Can you squeeze out more efficiency in your processing? Is there a piece of equipment that would help?

Is the lower profit a one-time event? Perhaps there was an accident and you have to pay medical expenses of a customer. Or you had a back-room fire and had to spend money to put yourself back in business. Maybe you decided to help out a faithful employee with a gift of money. Even though these things won’t happen again, they impacted the bottom line. Be careful that, next time, you can cover the expense and maintain profits.

Finally, is lower profits due to the fact that you and /or your staff are being careless? Too many refunds, too many payouts for damaged goods, too much reliance on creditor statements, and a greater inattention to bill-paying all are results of lax management. Perhaps inefficient staffers side-swiped your wash-fold-dry volume. The cure for this is to become revitalized.

A two-week vacation could help you come back with a renewed determination to achieve your target profit. Once refreshed, go back to the basics: First, acknowledge that every dollar of revenue counts. Second, the inflow must be greater than the outflow, every month, every week, every day.

Never lose sight that the bottom line is what really matters.

About the author

Howard Scott

Industry Writer and Drycleaning Consultant

Howard Scott is a former business owner, longtime industry writer and drycleaning consultant. He welcomes questions and comments and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359; by calling 781-293-9027; or via e-mail at dancinghill@gmail.com.

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