I was once working with a business owner (let’s call him Steve) that had a small shop that was barely breaking even. Christmas came and the shop closed for the Christmas break. I sat down with Steve in the new year and he told me about the new building he had just signed a lease for. His current building was around 300sq ft. The new building was 85,000 square feet!!!
I was shocked. I asked him why and his response was that he was going to relocate the store and really crank things up to start making some real money.
Steve had fallen into a trap I often see business owners make. They think that if they add more zero’s (aka make things bigger) their problems of not making a profit will magically disappear. This is rarely true.
As you all know the purpose of a business is to make a profit. There are lots of things that go into the equation. Cost of goods, cost of labour, shipping, the list goes on but at the base level it’s actually a simple math equation:
Sales price (S) – cost (C) = Profit (P)
If my selling price is higher than my cost then my profit will be positive. If my selling price is lower than my cost then my profit will be negative. I will be losing money.
Back to Steve. Not only would Steve’s problems not magically disappear by moving to the larger building he would also have additional problems that would show up. Maybe his line of credit or credit cards wouldn’t be large enough to handle the amounts he needed to make the business cashflow.
What should have Steve done?
To begin with I doubt he knew his numbers. I doubt he could give a breakdown of how much each component of his products cost and therefore how much his products cost to make. This is why I think knowing your numbers is so critical (read more about that here).
Once he knew his numbers then he could look at optimizing them to make a stronger profit (I walk through how to do that here).
After he has everything optimized then it would be time to use this principle to his advantage because:
If more zero’s doesn’t change the outcome when you are losing money it’s likely to not change when you are making money.
So begin by knowing your numbers and then optimizing your business before you look to scale.
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