Common Mistakes Part 3 - Profit is King!

Turnover (the amount of money your business takes) is too often the bench mark for how a business is doing.

I have known some very intelligent people who failed to know the difference between turnover and profit and seen many businesses that have chased turnover at the expense of profit.

Many businesses are sold to the unknowing, priced on the basis of their turnover or their Gross profit.... neither is relevant unless you know how to read a 'profit and loss' and a 'balance sheet'!

Forget Turnover! Profit is King.

I once knew a fruit and vegetable wholesaler who wowed their friends, bank and small shareholders with a huge graph on their wall of their increasing turnover. The graph looked impressive as the company picked up contracts and took over it's competitors.

I was brought in by one of the smaller shareholders (back in the days when I did some company doctoring) to find out why he was being asked to put in more money to what he thought was a very successful company. My findings were stark, the company in question was going after turnover at the expense of profit.

The company had taken some huge contracts at very unfavourable terms, while they increased turnover enormously, they were highly unprofitable and were forcing the company to invest heavily in new vehicles, staff and IT. Worse still the company had diverted funds from a loan to expand a very profitable but much smaller part of the company to this turnover growth engine, depriving the company of the profits it needed.

I advised the shareholder to sell out after being unable to convince the main holders to stop following this dead end path.

The company went bust less than a year after, when their lead bank called in their overdraft facility, leaving the shareholders £100,000s out of pocket.

A few years later I spoke to the Companies former MD and he asked me what I would have done differently to save his company, I again reiterated my report at the time to stop chasing turnover, which he had totally ignored!

Unprofitable business is a total waste of time, don't kid yourself that it gives you the volume to make other business more profitable. Turnover is for show, profits are for successful businesses. If you can't make a real profit from a business deal, don't do it. If one of your competitors picks up a loss making deal...smile...you did not need it.

Work for a profit on every deal and walk away if you can not see it. Forget turnover, forget Gross profit... do less work and concentrate on your Net Profit.

If you are buying a company, be sure you understand the difference between Gross and Net Profit!