Show me the Profit

11th May 2016
“It’s been an amazing year – our best ever,” our new customer told me. “We brought on two enormous new contracts, which has made all the difference.”

In fact they’d just broken the £1 million mark, and by the sound of things, they were going to grow even faster the following year.

dreamstime_m_11443107.jpgBut then we took a look at their accounts……..

And the full horror revealed itself.

Unfortunately, while their turnover had grown by leaps and bounds, so had their expenses. By the time we accounted for all their overheads – including admin costs, some extra contractors, raw materials and more – there was virtually no profit left.

When I broke the news to the company owner, he was incredulous.

“But I don’t understand!” He repeated several times. “We’ve brought in more this year than ever before. How is that possible?”

Unfortunately, he was making a common error, confusing turnover and profit.

While most of us understand the difference in theory, it’s very easy to get wrong in practice.

Like this gentleman, many business owners are distracted by the large number on the monthly invoice, and miss the fact that this “desirable” contract is killing their company.

Others believe they know where the profits lie in their business, but are wrong. Your white widgets might have been your most profitable item last year – that doesn’t mean they are this year, if the cost of your raw materials or staff has crept up.

Or perhaps no one has ever calculated how much this product or service really costs to deliver, once you look beyond headline costs.

The result is that you pour your time and energy into areas which do little for your business. They may even cost you money to deliver!

Do you know where the profit lies in your business?

Being able to answer this accurately is the key to sustainable growth.

If you know which of your products and service is delivering profit – not just income – you can focus on them. Then take your loss-making projects, and either work to make them more profitable, or if that’s not possible, drop them.

You’ll be making more money immediately.

Conduct this exercise regularly, because business conditions change all the time.

And keep your eye on the prize. Would you rather run a £1 million company that was profitable, or a £5 million company that was not?

To really grow, focus on profit, not on turnover.

Garry Mumford is author of the free guide, The 5-Step Process To Get Your Customers to Pay on Time, Every Time. He is founder and Director of Insight Associates, which since 1992 has been providing owner managed businesses with the financial insight essential for development and growth.

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