TURNOVER IS VANITY
by David Napier
The business saying “turnover is vanity and profit is sanity” means what in practice?
In the current economic downturn it could mean that your revenue has fallen so your business has to take on more to replace its lost turnover. Unfortunately as competition increases and prices tend to be cut to win more business this replacement lost turnover does not cover the business costs it was supposed to and more than likely will leave your business with a loss.
In my experience of over 27 years in the finance industry many SME’s assume that by “chasing” turnover their problems will be solved. Regrettably this couldn’t be further from the truth and in many cases those same business may have been better to take the drop in turnover but at the same time look at ways to reduce their costs. The added benefit of this is that it may allow you to reduce your prices and attract more business.
What your business cannot do is take on business that is not profitable.
Be wary of big customers and big orders. These can lead to overtrading and when the business takes on more work than it can handle it will run out of money fast and probably out of business. Big customers will often ignore your payment terms and implement their own. This can mean you waiting months to receive your payments and could also have a knock on effect with smaller more profitable customers. Ultimately when the cash dries up so does your business.
Always bear in mind the golden 80/20 rule:
20% of your customers are likely to make 80% of your profits so concentrate on them. Do not neglect these vital 20% who will earn you the most profits and look to get more business from them or seek out similar businesses. Remember it will cost your business up to five times as much to get a new customer as it does to keep an existing one.
Ask your suppliers to cut their prices this will allow you to maintain your profit margins. If your supplier does not agree to this they may be happy to extend your payment terms or you could shop around for an alternative supplier.
When cutting costs always start with non-essential expenditure; rent, rates and utilities can wait for another day. You can also raise cash by selling dead stock or equipment even if you make a loss on these items it could keep you in business with a necessary cash flow injection.
I’ve lost count the number of businesses I have seen which have stumbled in to business; a hobby or favourite past-time. Typically it is these that run out of cash first and this can be due to many factors but incorrect pricing and consequently little or no profit is usually the outcome.
napier Business Consultants
Tel: 07835 404167