“I just need to sell more, and I’ll get out of this hole.”
“I just need to sell more, and I can retire in five years.”
“I just need to sell more, and I’ll be able to grow.”
“I just need to sell more and …………”
Ask the typical business owner what he needs to reach his goals, and the answer will be, “More sales.”
However, did you know that many owners are selling their way into a hole, out of business and out of ever being able to retire? In some cases, the more you sell, the more money you lose. It is true because sales and profit are not the same things – sales do not always equal profit.
Let’s follow the money in a simplistic example to get a better idea of how sales may, or may not, put cash in your pocket at the end of the day.
You sell three products – trowels, tomato trellises, and watering cans – from your wholesale catalog. The trowels sell for $1.00 a piece, the tomato trellises for $3.00 and the watering cans for $5.00 each.
A customer buys 1 of each product and gives you $9.00. However, you do not put it into your pocket and call it a profit. You have to subtract all expenses, costs, and taxes for obtaining and selling the products.
The trowel’s total cost to produce is $.50, tomato trellises are $3.50, and a watering can is $3.50. Your total expense for the sale is $7.50, and your profit is $1.50. Sales minus all expenditures equal profit (S – E = P). Your sales revenue was $9.00, but your profit or bottom line was $1.50 for that sale.
However, what if the next customer buys three of your tomato trellises? You lose all of the profit you have just made – $9.00 (1st sale) – $10.50 (2nd sale) = – $1.50. If tomato trellises are your best seller, you can end up with a loss for the day, week and month.
As you can see from this simple example the devil is in the details: tomato trellis profit is negative; trowel and watering can profit are positive. Business owners are continually challenged by how to balance profits, and that is how it is possible for a company to make a high volume of sales and still go out of business. It is also how selling your way out of a hole may not work, and can even make the situation worse.
So, how do you avoid making this mistake?
If the devil is in the details so is an angel. Profit engineering will help you control the numbers, rather than the numbers controlling you. Knowing how to find, document and use hard numbers is vital to making a profit. With hard numbers, you can ask the right questions and come up with the correct answers. Let’s go back to the example.
Tomato trellises – Why is my profit in the negative? How do I fix it – raise prices, lower costs, control waste, buy in bulk, improve productivity and quality? Is it cost effective to fix the problems or should I discontinue them? What percentage of sales do they represent? If the market won’t support an adequate price to produce a profit, can I at least break even on that item, or use it as a loss leader?
Trowels and watering cans” How will I increase the earnings on these products? If tomato trellises cannot be made profitable can or should trowels and watering cans offset the losses? Can they make me the money I want to make? Should I add another product(s)?
Understanding the numbers gives you the opportunity to ask practical questions, make rational decisions and implement reasonable solutions.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: