This is a popular saying that many of you may have heard of. But what exactly does it mean?
Turnover is Vanity
Let’s explore by way of an example. Let’s say you win a brand new contract of your dreams. It’s a game-changer for you, your biggest customer to date. You are delighted and celebrate your fabulous achievement. Quite rightly – it’s a big deal!
So now you raise your first sales invoice to your exciting new customer. Your turnover, which is also known as income, revenue or sales, looks fantastic. Well done!
Profit is Sanity
Now we start to look at what it costs to service this new contract. Do you need more staff? Do you need more office space? Do you need to rapidly train up your existing staff to be able to deal with this new contract? What legal or professional fees might you incur on this contract? Do you actually receive more in income than it costs you to deliver? Is this new customer, in fact, even a profitable one? The financially savvy will have already looked into this before entering into a new contract.
Although turnover from your new contract is incredibly important, it is ‘vanity’ unless it is a profitable contract. However, for some, even an unprofitable contract may be of strategic importance. Perhaps, for example, having this customer on your books will automatically attract other potential customers to be interested in you. So there could be good and valid reasons for accepting an unprofitable customer.
We now know it’s great to have new sales but unless they are profitable sales, you would be unlikely to stay in business for long. The saying is now starting to make more sense: ‘turnover is vanity, profit is sanity’.
Cash is Reality
But it is cash that is reality. Unless that fabulous new customer actually pays you, in full and on time, they are not a fabulous new customer at all. Does it cost you a huge amount in time, energy and resource to chase and chase and chase that new customer to get the money out of them? Without that cash coming through the door, how can you pay your staff salaries and bonuses and all the suppliers you owe money to? How can you invest in any future growth? Cash is reality because your business cannot exist without money coming in from your new and existing customers. Even if you are profitable, you will not survive if the cash doesn’t come in.
As Lord Alan Sugar says: “getting paid is the most important part of your business.” Given that’s the secret to his success….
So now you know why “turnover is vanity, profit is sanity and cash is reality”!
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