We have all heard the old adage “we will make it up in volume,” and have either laughed or cried depending on how serious we thought the speaker was. It is concerning that many small business owners don’t know what the profit is on each and every order. First, the stories:
The 40% Customer …
Not long ago, I was brought into a company that had gone through significant challenges. After being purchased, they lost approximately half of their sales within two (2) years and needed to know why – this is a different story that I will post about in the future. During my analysis, I found that their largest customer accounted for approximately 40% of their sales, but only 3% of their profit – you don’t want or need many more of these customers!
The naïve small business owner …
Recently, I was talking to a small business owner and I asked, “How do you know that you are profitable?” I almost fainted when I heard the response. He told me that he looks at his bank account at the end of each month, and if there is more money in the account than the previous month, then he must have had a profitable month. He had no other tools available to determine which projects were in fact profitable, and which ones were costing him money. Surprisingly, this scenario is more commonplace than you might think.
Out of control …
During a meeting with the CEO of a significant small service business, he stated that he was profitable on half of his customers, but was losing money on the other half. He was barely at break-even after seven (7) years of sales even though he had been on the “Fastest Growing” lists for a number of those years and had hit the ~$30M per year mark. I didn’t blink, swallowed hard, and asked “Why?” The answer was he didn’t know, and that he had never bothered to develop a customer profile to understand what a profitable customer looked like. I’m not absolutely sure, but I think a $15M profitable company may be a little better than a break-even $30M company.
Do the analysis if you want to maximize your company’s potential …
We all have been in situations where we have bid too low, had vendor supply difficulties, manufacturing had scrap/rework overruns, or we just had bad luck – stuff happens. It’s OK to make mistakes, but it is NOT OK to continuously repeat them. You should analyze each project, product, customer, and industry niche so that you know what is profitable – and then repeat that success. If a project or product is not profitable, then change something, anything, and try again. Knowledge is power and without it your chances of sustainable success are very limited.
The Bottom Line:
Your company will grow and prosper if you focus on profitable business and NOT just sales. Sometimes you have to walk away or raise your prices to be successful. Believe me, your customer will understand since they need you to survive so that you can help them in the future.
