You have almost certainly come across the old adage “Turnover is Vanity, Profit is Sanity, Cash-flow is Reality” – but what does it really mean?
Well here’s a few thoughts for you.
Turnover is the lifeblood of any business – it needs to be properly managed at all stages of your business life, with issues like:
- What is it I am actually selling?
- Where do my sales come from / how do I spot potential clients?
- What strategy have I got for my marketing, my advertising and my overall contact strategy?
- How do I decide my sale price, what is the right price for goods or services?
- How will I be able to get my business growing?
- Organically – use my existing client base and sell more to them
- Commercially – taking on new clients who will buy from me
- By acquisition – finding a suitable competitor and acquiring their business
Rapid Growth versus ‘Measured’ Growth / Diversity versus Synergy.
Turnover, Vanity & Sanity
This list above could go on and on. It is so easy to see how and why turnover is the main focus of attention when it comes to considering business performance.
But, look out for “turnover” for turnover’s sake . It is common to hear business owners talk about the ambition to be a £1m turnover business, winning that mega contract if it isn’t profit generating or cannot be financed. That’s is where “vanity” kicks in and starts to bite.
“Profit is Sanity” is definitely one never to forget – Remember you are in business to earn money, that’s the bottom line. It will keep you sane, make you feel good and stop you pulling your hair out (if you have any left), especially when there is a decent surplus after all the bills and salaries have been paid. Remember that salaries include your own income!
So, making sure your business is focused on profitable turnover, not simply turnover. Let’s give out a few top tips to help;
- Margins. Know what your margins are, plus make sure all your staff do also
- Ensure all related costs are included. It is common to see businesses forget to allow for additional variable costs like postage, delivery/ haulage, sub-contractors and equipment hire etc. Also make sure you have properly costed your overheads, remember your fixed costs like additional staff, premises, IT, insurances etc
- Think about how it will affect your present business – never ever loose sight of your existing clients when you go chasing the new ones
- Manage & Challenge. Love that saying as it is relevant in so many parts of your business. In this case manage and challenge your overheads – regularly
Know and understand your “break even” sales figure. Every week It is massively motivational to know that all your overheads are covered by Wednesday. The rest of the week is then real Profit ! (to work out your ‘breakeven’ ,simply divide your Overheads by the Gross Profit Margin eg Overheads =£100k – GPM = 25% – Breakeven is £400kp/a or just under £7700 p/w )
But that’s not the end of the Story…………………..
The hard work has been done. Turnover has been increased and your turnover is all profitable.
But where IS your profit?
With a fair wind it will already be in your bank account, but that’s not always the case. Now “cashflow” starts to feel a bit tight. In general you will have paid all the overheads, bought the stock, paid the sub-contractor etc. However you still haven’t actually been paid by your client.
That is the big difference between PROFIT and CASHFLOW – the management accounts are looking great but the bank account is not reflecting this.
“Cashflow is Reality” is a definitely true-ism, you can help manage it by:
- Agree terms of trade. This means agreeing terms with your clients and suppliers. These need to work well for both of you. It is also a good idea to Credit Check clients and suppliers, get a sensible limit in place
- Invoice on time. Sounds simple but so many companies do the work but don’t invoice. Invoice promptly and make sure your terms of payment – and how to pay it – are very clear
- Have a system to manage collection of invoices, then monitor this closely. The money is no good to you if it’s still in their bank account. Chasing invoices on time will help avoid bad debts. A bad debt is worse than not having the turnover in the first place
- If you keep stock, ensure you only keep what you need, plus make sure you manage it closely. If you can get deliveries from suppliers on a weekly basis then why carry a month’s supply? Check your stock and get rid of any ‘dead stock’, sell it cheaper but turn it into cash asap
- If your business is growing – then, generally, so will your cashflow requirement. Get on top of your cashflow, assess your cashflow needs as far in advance as your business allows. Look at what finance you need to cover your cashflow. Lenders are always far more receptive to a timely, pro-active request for help with cashflow from a well managed business. A reactive request for cashflow finance shows a business owner not in control. Either way, always seek agreement to finance first – don’t just issue a cheque, cross your fingers and hope it will be OK!
No one ever said running a Business was easy, which is why my Business Advice Service is here – to help your business look like a great business on paper – and feel like a great business in reality.
By David Salkeld
This guest blog post was provided by David Salkeld of Frost Group. For more information on what David can achieve for businesses then have a look here. For any general queries about this post then please contact Lime Consultancy direct on 01293 541333 or via the website here.