“Turnover is vanity, profit is sanity, cash is a reality”
When we talk about business and the importance of success, we are often reminded by everybody that “business is about the bottom line”, however when we listen to all the advice being thrown at us the one concept that stands out most of all is when the business gurus, coaches and bankers tell us that we must increase our turnover if we have any hope of surviving. This is of course two very different and even contradicting statements.
The fact of the matter is that simply increasing your turnover will not necessarily improve your business, it could be more damaging than simply closing your doors. But let me explain by way of an example.
Tumi owns and runs a Bistro that is just not breaking even resulting in her being dependent on her bank overdraft. The bank has realised this and has given her notice of their intention to cancel or at least greatly reduce the overdraft. She asks for a meeting with the bank to investigate her options and they promptly suggest that she increases her turnover as that will of course solve all the world’s problems.
She takes this advice and promptly implements her marketing plan to increase sales. Now the first form of marketing we all jump to in order to increase our turnover is by offering specials. What this means is that you are giving away margin to all your existing clients whilst hoping to sell more of the item to a new client or two.
Even if this is successful the discount you sacrificed ate even more into your profits and although Tumi increases her turnover by 20% she reduced her margins from 30% to 20% in order to achieve this growth, resulting in her profit being even less than before. So, in short, all you need to do to increase your turnover is give away more discount, but you will be even more dependent on an overdraft as you are running at a bigger loss.
What these geniuses should advice is to increase your turnover whilst maintaining your margins. But even this is a lazy approach.
When one applies your mind it is often possible to increase the profit of a business without increasing the turnover. A business might have an inherent problem, resulting in a Gross Profit loss, and simply increasing your turnover will then increase your losses.
Confirm your margins, confirm your trends and once profit is insured, start thinking about increasing your turnover.