It’s Not About Turnover

It’s easy to get lulled into a false sense of security when turnover is good and going up.

But it’s NOT about the turnover. It’s about what’s LEFTOVER. It’s about the profit, and growing the profit dollars.

The not-for-profit business

So often I see owners chasing more turnover with no idea whether they’re making a profit. Their prices aren’t based on what the product or service costs, because they don’t know those costs. They copy the competition, or they haven’t reviewed their prices in years.

Then at tax time they wonder why there’s no money left in the piggy bank to pay the tax. Or themselves!

Because when I go through their last three or four years of financials and analyse the trends, that’s what they’ve got. A not-for-profit business.

The first warning sign

It’s a Profit & Loss statement with a single line called “Income”, then straight into “Expenses”.

• No breakdown of income by product category or service type
• No section for Cost Of Goods Sold (COGS)

Your COGS lines should mirror your income lines, at least at category level. Your accounting system can break everything down to a cost per item or service. Then you can set your prices at the margin you want.

What your accounts should tell you

Set them up to answer the questions that matter. At minimum, depending on your business:

1. How much profit each product or service makes
2. Who your profitable customers are, by account, category or other demographic
3. Whether some areas are more profitable than others
4. Where the most profit dollars come from for the least effort

There are plenty of ways to analyse the data. But only if you collect it in the first place.

When you can see which income streams make money and which don’t, you can make good strategic decisions. And grow the profit!