Resolving the Sales Versus Loans conflict
Business isn’t a predictable beast. It goes through good times, it goes through hard times. This is not good for cash flow, the lifeblood of your business. Add to this the need to service your loans as they become due and you could be facing a dilemma. How do I pay my loans, and my staff and my creditors and my other costs?
In this series of articles John White looks at things to consider in order to pay your loans by asking some fundamental questions.
PROFITABILITY AND SALES
Look at your accounts. The first line is sales. A very important thing, because if the number entered there is less than the cost of sales you have a problem. In fact you don’t have a business. You could be insolvent which is not a good place to be.
Sales can go up, stay the same or be falling.
When sales are on the up, they need to be profitable sales. It is of no use to do work that you know isn’t going to make you money. You’d just be a busy fool wouldn’t you?
When your sales are on the up (profitable or not), there may be a need for more working capital or even investment. That can add a cash burden you don’t really need. So if sales are growing you must make sure you arrange your finances accordingly.
When sales are going down or not growing it means that your profits are low. So what can you do?
Research is the key. Look at your most profitable customers (or product or territory) applying the Pareto principle. This states that 80% of your profits will lie in 20% of your customer/product/territory range.
Focus on your biggest customers. They are the important ones. Ask yourself:-
- How many are there?
- Are there on or two main ones?
- What is the likely impact in losing one?
- How can you spread the risk?
This is a time to look at your middle size customers. Ask yourself the same questions but be objective, any unprofitable ones should re-priced. (Why be a busy fool?)
As for your smaller customers, focus only on the profit making ones. You should consider losing the ones that don’t make you money. I appreciate that this is not easy, but remember that you are in business. Again be objective and ask yourself if the customer is growing and will join the top tier of customers.
With regard to pricing remember that a 1% increase in price will have a bigger impact on profits that a 1% shift on any other cost centre of your business. e.g.
Business turnover £1 000 000 with a materials cost of 50% 1% increase in sales = £10 000
Business turnover £1 000 000 with a materials cost of 50% 1% supplier saving = £5 000
- Look carefully at your pricing policy.
- Do the arithmetic.
- Keep it profitable and in line with inflation.
Be prepared to shed clients that do not make you money.
In the next article we will be looking at Materials.