Sanity Check

Published: 13 Nov - 2018 by Ben Rendle

Turnover is Vanity, Profit is Sanity, Cash is King! We have all heard the saying Turnover is Vanity, Profit is Sanity, Cash is King. Yet many business owners still seem to focus on the turnover of their business. This can be misguided especially if you are not certain that you are making a profit on each item or service sold. Indeed if you are selling a product at a loss the more your turnover increases as you sell more of the product, the more money you lose. This will inevitably cause a serious cash flow problem at some point. It is therefore imperative that business owners fully understand how their business generates gross profit (sales price minus the cost of the product), as this is the most important metric within a business.

Where does my profit come from?

 

First we need to analyse the makeup of our gross profit which of our products and services are profitable and which are not?

We then need to establish whether the profitability of our offering can be improved?

If we cannot make a gross profit from our products (with some exceptions) we should look to discontinue the product and focus on those which are profitable.

When we know which of our products are profitable we can then look to understand which of our customers are most beneficial to our business.

In theory 80% of a business’ profits will be gained from only 20% of its customers.

Whilst in reality these proportions will often vary, the theory still holds that we should focus the majority of our efforts on the 20% of customers who generate the majority of our income.

When as a business owner we fully understand the drivers of our business’ profitability, we then possess the key to driving our business to a better future.

 

When was the last time you checked the sanity of your business?

BR Accounting & Business Services can help you to identify the drivers of your profitability and offer suggestion on how best to increase your profits, contact us today to arrange your free no obligation initial meeting.

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