How many times have you heard “turnover is vanity and profit is sanity”?
For a well-used proverb it’s not having a lot of impact because almost everyone is still obsessed with turnover!
I know that in my world of business support and advice it seems to be all people care about … “so, what’s your turnover?”
But the thing is, a focus on turnover rarely gets you where you want to go. But I come across a lot of business owners don’t even know where they want to go, they just keep trying to beat last year’s turnover without giving it much thought. Like by keep growing sales they’re eventually going to win, right?
I don’t even know my sales target
I honestly couldn’t tell you without looking at my accounts what my turnover was last month, or what it will be this month or this year.
But I CAN tell you exactly what my gross margin is.
My sales line can vary a lot depending on the mix of work and whether I did the delivery or one of my team did. Which is why turnover means absolutely nothing to me.
But my gross margin – that’s everything.
If I focus on my gross margin and control my overheads, I’m determining my net profit from the get go – never wondering what profit I’ll end up with each month or year. And because my net profit is designed to give me the life and future I want, I don’t have to worry too much about the future.
It’s easy to focus on sales…..
Sales is a really easy metric isn’t it? It doesn’t take too much effort to come up with a sales target.
But knowing what your bottom line retained profit needs to be, and how to get there, well that takes more care and consideration.
And it can put the focus on the wrong area and even cause dysfunctional behaviour when everyone is just focussed on landing sales instead of margin. This can especially be a problem when you’re paying sales people a commission on sales instead of gross profit.
You may be surprised (or not) to know that I come across a lot of businesses where the sales people have no idea what their gross margin is or should be. And it gets worse –they don’t understand what makes up the gross margin. I even come across business owners who don’t understand their own gross margin, and unsurprisingly these are usually the businesses that don’t make enough money.
Understanding sales and margin mix
A lot can happen between the sale and the gross margin you end up making, depending on the complexity of your business.
- The profit of that individual customer
- The profit of that individual product or service
- The mix of products or services
- How easy or difficult it is to sell the higher margin products
- How accurately the product or service was quoted
- If the customer is high maintenance (you know what I mean!)
- How well that service was delivered- was everything right first time?
- Returns / damages / quality issues
- Your pricing decisions
Start with the end
Which is why when I help business owners create their financial strategy, I start with what the bottom line net profit needs to be, NOT with what sales need to be.
Only then can you know if the sales you’re targeting will give you the life you want.