Author: Pat Pattinson

Business rule number 1: Profit not turnover.

business rule number 1

Talk about business and the importance of success, we are often reminded that “Business is about the bottom Line”. Listen to all the advice being thrown at us and we soon realise… The one concept that stands out most of all is when the business gurus, coaches and bankers tells us. “You have to increase your turnover if you have any hope of surviving”. This is of course two very different and even contradicting statements.

The fact of the matter is that simply increasing your turnover will not necessarily improve your business. It could actually be more detrimental than simply closing your business. But let me explain by way of an example.

Tumi owns and runs a Bistro that is not breaking even resulting in her being dependent on her bank overdraft. The bank realising this has given her notice of their intention to cancel or greatly reduce her overdraft. She asks for a meeting with the bank to investigate her options, they promptly suggest that she increases her turnover as that will of course solve all the world’s problems.

She takes this advice and promptly implements her marketing plan to increase sales. Now the first form of marketing we all jump to in order to increase turnover is by offering specials. What this means is that you are giving away margin to all your existing clients, whilst hoping to sell more of the item to a new client or two.

Even if this is successful the discount you sacrifice cuts more into your profits. Although Tumi increased her turnover by 20{2a528d543e649344218b0d4736065faf57f3cd51818dd3afc8a9acdf78ec18ee} she reduced her margins from 30{2a528d543e649344218b0d4736065faf57f3cd51818dd3afc8a9acdf78ec18ee} to 20{2a528d543e649344218b0d4736065faf57f3cd51818dd3afc8a9acdf78ec18ee} in order to achieve this growth resulting in her profit being even less than before. So in short all you need to do to increase your turnover is give away more discount, but you will be even more dependent on an overdraft as you are running at a bigger loss.

What these geniuses should advice is to increase your turnover whilst maintaining your margins. But even this is a lazy approach.