(This article originally appeared in Entrepreneur)
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I was recently at a client’s offices to review their June 30th financials, and guess what? My client happily reported to me that her revenues were up over 10%! Woo-hoo, right? Well, not so fast.
It’s true that — despite the warnings of a recession and some negative economic data — a fair number of my clients have been doing pretty okay this year. That’s not to say they’re not concerned about the second half of 2022. But at least for the first half, I can name many who had an increase in their sales revenues. Good for them. Good times.
But hold on, let’s not fool ourselves. Did they really have an increase in sales? When I dug deeper into this particular client’s numbers, I saw the truth. And the truth wasn’t pretty. The fact of the matter is that her sales didn’t really increase. What increased were prices.
That’s because we’re in inflationary times. The producer price index (PPI), which is the barometer of costs for many of the B2B companies I serve, is up 11.3% year-over-year. But that’s masking even higher prices in core raw materials. For example, the costs of industrial chemicals, construction materials, iron and steel, aluminum and shipping have risen anywhere from 15% to 40% since last year. Labor is up 5%, with the average national hourly pay now at about $32.
My client, being the smart business person that she is, has adapted to this new reality. She’s been keeping a very close watch on her overhead. But as raw material and production costs have eaten into her margins, she’s been forced to raise prices herself — in many cases between 10% to 12%. She started doing this at the beginning of the year and has continued the practice through June 30th.
Now that you have the facts, what have you figured out about her sales? Yeah, that’s right: The increase in revenue was really just due to price increases caused by inflation. And it was done to maintain margins. To say that sales revenues are up is, well, misleading.
But that’s what many companies right now are doing. They’re telling their banks and their shareholders that they’re growing. Growing because sales are growing. But sales aren’t really growing, which means that if you’re a reader of financial statements, you’d better be asking some hard questions.
And the hardest question is this: What were shipments like this year compared to last? What number of goods were sent out the door? Or, if you’re a service firm, what were billable hours this year compared to last year?
These are the real numbers that define growth in an inflationary period. We can’t rely on dollars because the dollars are inflated. So we have to focus this year on quantities. Units. Boxes. Pallets. Rolls. Grosses. Feet. Yards. Cases. Time. These things are not subject to inflation. They are the true metrics of sales revenues in 2022. Not dollars.
So don’t be like my client and fool yourself into thinking that your business is growing when all you did was increase prices just to keep up with inflation. Measure activities and things. Ignore the money this year. That’s the way you can really track how things are going — and recognize any potential issues before they become real problems.