I have a client whose business has suffered declining sales for the past three or four years.
That’s rarely a cause for celebration, and at one stage she was getting pretty depressed about it.
But the odd thing is, during this time profit was increasing. In fact, if you look at the numbers, you’d see that there has been an inverse correlation between sales and profit from 2014 to now.
In other words, in each year, sales have reduced and profit has risen.
You’ll agree that seems somewhat counter-intuitive. After all, if you don’t generate the income, you can hardly expect to make the profit, can you?
Generally, the answer to that would be yes. After all, taken to its logical conclusion, if sales were zero, the chances of a healthy profit are the square root of not much.
But it’s not always the case that declining sales means less profit. My client’s situation is a great example of how important it is to really get to grips with what your numbers are telling you, rather than making rash assumptions based on what you think the answer should be.
I won’t spill any secrets, but this client is in a business where a bit of favourable press coverage involving certain celebrities can have a massive positive impact on sales.
Some years ago (before I got involved), this happened and sales went through the roof. The client, believing this represented the successful scaling of the foothills leading to the sunlit uplands of wealth and prosperity, ramped up the business to cope with the increased demand.
Unfortunately, this is a fickle business, and sales were soon declining back to what I now think is probably sustainable normality. An almost complete lack of management information meant that no-one seemed to notice that staff costs in particular were at boom levels still. A couple of years of truly eye-watering losses resulted.
To cut a long story short, I turned up and we instituted a fairly fierce programme of rationalisation (ie, getting rid of surplus people, mainly). During this time, sales continued to fall, but the cost base was so bloated that we more than compensated for that in reduced expenditure.
So whilst sales fell, profit increased and the bank account crept up. Sales have now stabilised and the business has an infrastructure more suited to what is, rather than what it was. It’s an ongoing project.
The moral of the story is – don’t be seduced by sales numbers. They mean nothing in isolation. You have to take costs (and debtors) into account as well. Remember the old accountants’ favourite:
Sales is vanity; profit is sanity; cash is reality
It’s almost a one-line instruction in how to manage a business. Always keep it in mind. It’s nothing new – Charles Dickens was no slouch when it came to business. Perhaps a trifle dodgy on the marital fidelity front, but you can’t fault Mr Micawber’s advice to David Copperfield:
“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Who needs business gurus?
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.