Turnover is vanity, profit is sanity and cash flow is king

Posted on November 25, 2013 by FGL

You’ve probably heard the old adage “turnover is vanity, profit is sanity, cashflow is king” – but what does it really mean? Well, here are a few thoughts for you.

Turnover

Turnover is the lifeblood of any business, and needs to be managed effectively at all stages of your business, with issues like:

  • What am I actually selling?
  • Where are sales going to come from / how can I identify potential clients?
  • What’s my marketing / advertising / contact strategy?
  • How will I set the right price for my goods / services?
  • How will I grow my business?
    • Organically – selling more to existing clients
    • Commercially – selling to new clients
    • By acquisition – buying an existing business
  • Rapid growth versus ‘measured’ growth and diversity versus synergy.

The list could go on and it’s easy to see how and why “turnover” is the biggest attention grabber when it comes to business performance, and rightly so. However, watch out for “turnover” for turnover’s sake – and don’t chase the dream of being a million pound turnover business or getting that huge contract if it’s not profitable or financeable. That’s where the “vanity” bit kicks in!

Profit

“Profit is sanity” is definitely one never to forget. Generally, we do what we do to earn money – that’s the bottom line. And it will definitely keep you sane and stop you pulling your hair out if there’s money left over, after all the bills have been paid.

So make sure your business is profitable turnover focussed, not just turnover focussed – and here’s a few tips to help with this:

  • Know your margins / mark up rates – and make sure all your staff do as well
  • Make sure all related costs are included – watch out for additional variable costs like postage, delivery, haulage, sub-contractors, equipment hire etc. and cost out any permanent increase in fixed costs (overheads) like additional staff, premises, IT &technical support, vehicles, insurances etc.
  • Assess how it will affect your existing business – never lose sight of your current clients in the chase for new ones
  • Manage and challenge your overheads regularly
  • Know your “break even” sales figure every week. It’s very motivational to know that all the overheads are covered by Wednesday, and the rest of the week is real profit!

But that’s not the end of the story - you’ve done all the hard work, increased your turnover profitably. But where IS your profit?

Ideally, it’s already in your bank account, but that’s not always the case, and “cashflow” begins to feel a bit tight – generally because you have paid all the overheads, bought the stock or raw materials, paid the sub-contractor etc., and you still haven’t actually been paid by your client. That’s the difference between PROFIT and CASHFLOW – the management accounts will look great but it doesn’t feel great!

Cashflow

“Cashflow is King” is a real true-ism and you can help manage it by:

  • Agree terms of trade with your clients (and suppliers) that work well for both of you
  • Make sure you credit check them and you have got a suitable limit in place
  • Know when terms are being “stretched” and make contact sooner rather than later. Have a system to manage this closely. The money is no good to you if it’s still in their bank account – and you don’t want any bad debts (that’s worse than not having the turnover in the first place)
  • If you carry stock – make sure you only keep what you need and manage it closely. If you can get deliveries from suppliers once a week, why carry a month’s supply? And always check out your ‘dead stock’ it’s better to get rid of it and turn it into cash asap
  • Assess your cashflow needs as far in advance as possible – and make sure you can fund it or agree support (from the bank) in good time. The banks are always far more receptive to a timely, pro-active request for help from a well-managed business, rather than a reactive – ‘I need a £5,000 overdraft facility tomorrow’ type call. But either way, always ask first and don’t just issue the cheque and hope it will be OK!

No one ever said running a business was easy and that’s why our Business Advice service is here – to help your business look like a great business on paper – and feel like a great business in reality.