I’m not a great one for business platitudes but there are a few that are worthwhile revisiting.
Here’s one to consider, ready?
Turnover is vanity, profit is sanity but cash is king!
Hope that didn’t send you scurrying for the sick bowl.
However, the overuse of these sayings can diminish their underlying sound wisdom.
So, what measure do you use when you want to indicate to someone else the relative size of your business?
I have found that the commonly used measure is turnover or sales. The reason being it an easy measure that really does not give away too much information to anyone but actually when comparing businesses we soon run the risk of comparing apples with pears.
Interestingly, the majority of owners I meet can state the sales figure but struggle when asked about their margin, gross profit or the mysteries of the balance sheet. Indeed many owners believe that if the sales are forever rising everything will be fine and dandy.
The economic driver of every business isn’t turnover, it’s gross profit.
Put simply gross profit is what is left of the cash turnover once you have paid all the costs directly associated to those sales.
Gross profit is the true value added which in turn is the lifeblood of any business, it’s what pays for everything. The resulting profit then ultimately provides security for all the stakeholders of the business, the owners, employees. customers and suppliers. Profit is the pump primer to build long term sustainable wealth for you the owner.
In fact go one step further and strike the gross profit before ‘direct labour’ and you then have a value add measure that can be used to compare your business with different industries side by side, service industries compared to retailers compared to builders……(often the only variable portion of direct labour that is directly attributable to sales is overtime or productivity bonuses).
The added value per £1 you spend on employees (including direct labour) and the value added per £1 you spend on overheads gives you two easy measures that will allow you to quickly benchmark your business against other industries allowing you to challenge your beliefs about the profitability of your company.
Two great KPI’s for every business.