I talked to an advisor today who called me to get advice on a client's business. (I was flattered) The company has been in business for several years and occupies space in the healthcare industry, specifically pediatric healthcare.
The company had almost $3 million in revenues two years ago, a 27% gross margin and was profitable after operating expenses. The owner has a strategy of obtaining venture capital to make acquisitions, run the company up to $50-60 million in 10 years and sell to a strategic buyer. Good strategy. Right?
Last year, the business grew 38% to $4 million, gross margin increased $200,000, but declined 2% to 25%. The increase in revenues caused the business to increase operating expenses to create a loss for the year and a $280,000 negative swing in profitability.
Wait, isn't bigger, better? In this world of super sized this and mega that, we have bought in to the lie that bigger is better. In some instances, bigger is clearly better. But, in this case, it's not. The incremental increase in revenues caused gross margin to decline 2% on the entire revenue base, operating expenses increased so that company had a loss and a $280,000 negative swing in profitability.
When you grow make sure the growth is worth it. There are situations where losses are incurred to make an investment in the future. But, once the investment is made, make sure the profits follow.
Your thoughts?
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment