The phrase turnover is vanity, profit is sanity came to mind last week while writing the essential finance chapter of my new Double Your Business book.
Stephen, the owner of a CCTV business asked for my help with getting more sales. When I visited them, they had a big office and a number of staff. The business had grown to a decent size turnover but they were making practically no profit at all.
I realised then that their biggest problem was not sales, but management. We sat down and spent just a couple of minutes looking at their annual accounts.
The Gross Profit (how much they make before paying for fixed costs like wages, rent, utilities etc) for the year showed that on average, they were making 30% or less per job. Yet Stephen insisted that every job he quoted for was at a 55% margin.
This is where the turnover is vanity, profit is sanity phrase comes in. The owner, Stephen, wanted to grow sales when the real problem was with his margins. Something was going wrong on each job so that his profit was being whittled down from 55% to 30%.
If we had put lots of effort into improving his sales, it would have been more work at the same low margins, producing little profit for lots of effort.
Fortunately there was a paper trail to help us track down exactly where the money was going. It turns out that many jobs were taking twice as long to complete as a result of the engineers having to fetch spares or tools from the office half way through a job.
The time being lost to these return trips was stealing all the profit from the turnover he was doing.
Why Turnover is Vanity, Profit is Sanity…
Profit is what pays your bills, while turnover is what you brag about to your friends!
A quick fix to his business involving better systems to make sure engineers had everything they needed took no more than a couple of days to put into place.
With gross profits at 30%, sales were just high enough to break even. With the new systems in place, margins were up at 50% and set the business up to make around £143,000 profit.
If this is all sounds like jargon to you, the chances are you don’t understand your own accounts either.
You might even be suffering from a case of turnover is vanity, profit is sanity!