Sales Were Up, Profits Were Down: What Happened?

In my last blog, “Big Sales Don’t Mean Big Profits,” I told the story of two companies I worked with that had increasing sales but declining profits. They both had problems with their product mix.

It was too late for one company — the owners didn’t want to make the investment needed to keep it running after we identified the problem so they closed it down after 30 years.

We were able to save the other company, although it shrunk from a $600 million company to a $350 million company.

What could both of these companies have done differently? What could have kept them out of this situation, which caused one of them to go out of business completely and the other to shrink to almost half its size?

Although the circumstances related to the issues with their product mixes were very different, the root cause of the problem in both cases was the same: a lack of communication.

Company A, which was a $2 million company that manufactured and distributed products, ran into trouble when their lower-profit sales to big box stores increased, pushing their margins down until they were no longer profitable. The operations and sales manager knew that the percentage of the lower profit sales to the big box companies was increasing — it went from 20% to 80% — yet no one discussed it.

The chief financial officer must have recognized the situation because the profitability of the company was severely impacted, but also didn’t raise the issue. Because no one talked about it, no one attempted to fix it. As Peter Drucker said, “The most important thing in communication is hearing what isn’t said.” You can’t fix what you don’t acknowledge. So the situation just got worse.

With Company B, whose management assured me they did not have a problem with their product mix, we found that even though the company had spent millions on computer systems to make sure they knew exactly what their costs were, there was still a breakdown in the system.

We found that there had been a lot of turnover in one of the key positions responsible for the accuracy of the data going into the computer systems. The new people taking over were not being properly trained. So the company had been selling products based on inaccurate cost structures. Again, there was a failure in communication.

In this case, I was reminded of a quote by George Bernard Shaw, “The single biggest problem in communication is the illusion that it has taken place.”

Communication is one of the keys to the success of any business. In my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes” I discuss the value of honest and open communication. In the case of Company A, the management of the company should have noticed the drastic change that was taking place in their product mix and discussed the situation. Together they could have determined what the effect on the business would be and taken steps to deal with the inevitable decline in profits.

As for Company B, it had a breakdown in the quality of training new staff. The duties of people in a key position were not being adequately communicated so the job was not being performed as it should have been.

Good communication at all levels of an organization can alert you to ways to improve your company while also providing early warning signs if things are starting to go wrong. Open communication will not only help steer your company through hard times, it can prevent them from occurring in the first place.

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