Does this sound like you? Does your business plan revolve around hitting certain turnover milestones?
And if it does, are those turnover goals based on a sound profit strategy? Did your plan START with how much retained profit you want at the end of the year, based on you earning what you should, with decent pension contributions?
Or…. are your turnover goals just numbers that sound good? Are you trying to double last year? Or that classic I hear so often, double the turnover in the next 3 years?
In other words, completely arbitrary.
Driven by ego and vanity, or sound financial sense?
Ouch, that sounds a bit harsh doesn’t it? But it’s so easy to be seduced by the image that certain turnover levels imply. And to believe that the turnover we achieve is how our success is defined and measured:
“Got to hit your first million”
“My business turns over £5 million”
“I’m aiming for £10 million this year”
Somehow the defining measure of business success is our turnover.
Which is financial madness and MEANS NOTHING!
Let me explain
If your main goal is turnover then that will drive the culture of your business, which results in dysfunctional behaviours and bad sales decisions:
- Buying turnover – so taking any orders or customers just to hit targets
- Compromising on the quality of the customer
- Taking on risky customers who may not pay on time, or at all
- Taking on low margin jobs that drag the business down
- Taking on business that just doesn’t fit
- Having to work with high maintenance customers you don’t like and who lose you money
Just to hit a sales target that doesn’t mean anything.
A focus on building profit, not sales
Flip the thinking and start at the end.
Start at the end of your profit and loss plan for the year. What profit number do you want to see there? I recommend between 5% and 10% net retained profit AFTER tax and dividends because this builds financial strength into your business.
Make sure you’re earning what you should be. Caning the sales and still not being able to take the salary and dividends you want doesn’t look like any sort of success to me.
Are you putting enough into your pension for the future? Don’t make the mistake of thinking your business will be your pension. It may be, but this only happens for the few.
Focus on building strength and wealth as you go, not just hoping you’ll be in for a big pay day, some day in the future.
Oh and by the way, your chances of a big pay day are far more likely if you build a financially strong business.
Only then can you see what your turnover and gross margin needs to be, and then I suggest a healthy obsession with hitting gross margin targets, but let’s loosen the grip on the obsession with sales?
What’s my turnover?
I literally couldn’t tell you what my turnover was last or this month, or even for my March year end. I simply don’t pay any attention to it.
But I can tell you exactly what my gross margin was, is, and is forecast to be for the rest of the year, and so I know what my net retained profit is likely to be. And that’s driven by my own personal financial strategy that gives me and will hopefully continue to give me the future and lifestyle I want.
(Well I say I can tell you….. but I’m obviously not going to!)
Turnover IS vanity
You must know the old saying that “turnover is vanity but profit is sanity” but it doesn’t stop people keep falling into the same trap.
Is it vanity? Is it ego?
Or maybe it’s just easier than doing the harder thinking to work out what will really make your life work the way you want it to?