Why am I not seeing profit as I grow my business?
There is no simple answer to the question of whether you are seeing profit.
In general, a business should begin to see a profit between three and five years after it starts, but there are other factors that must be taken into account. Did you finance to acquire your business? Are you paying higher wages to yourself or your management than the business can sustain, and have those salaries increased as the business grows? Are you overstaffed for the amount of work that is being done? Are you writing off higher than normal levels of accounts receivable? Are you fueling growth through cash flows instead borrowing? Are you using leases inappropriately and too frequently? Was your business properly capitalized from the start?
All of these questions will lead to the answer. If the business owners require more wages than the company can sustain, this leads to long term problems as the business will always be short of cash. If you are overstaffed for the amount of work that the company has, then the question is whether that overstaffing is short term or long term. If you are overstaffed in anticipation of future projects then profitability will naturally follow. If you are overstaffed without future projects on the horizon then profitability will naturally suffer.
If you are writing off high than industry averages of accounts receivable, then profitability will suffer because you aren't getting paid for the work that you are doing. In this case, it is best to review the credit and collections policies of your organization to work on reducing these numbers - either don't allow credit to some risky clients up front, or be more aggressive in collecting the accounts after the work is done.
Financing the acquisition of capital assets is a large driver of perceived profitability. If the assets are leased to own, then the payments go directly to the bottom line and directly affect profitability for the term of the lease. Leases are also financing options which tend to carry higher interest (or imputed interest) rates. If the company is purchasing capital assets which are not fully utilized, then this also becomes a strain on profitability as the cost and payments of the asset don't contribute fully to the bottom line. In businesses where profit margins are slim, the difference between 90 and 95% usage of an asset can make or break the profitability of that product or service line and directly affects profit.
This is by no means an exhaustive list, but it should show that there are no simple answers. The most effective way to ensure that your profit is increasing with your business growth is to monitor these areas (and more) and ensure that the trends are moving in the right direction.Sample Document