E40: Let's Talk Profitability

In today’s episode, I dive into a crucial business topic - profitability.

You’ve likely heard the saying “Turnover is vanity, profit is sanity.” But what does that really mean for your business? Some argue that turnover is king, while others insist that profit is all that matters. I believe the answer lies in balancing both.

I share a personal story of how I unknowingly sold products at a loss for months, despite strong turnover numbers. This experience taught me a hard lesson about business finances and the importance of managing profitability.

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Transcript

Hello & welcome to Dream Business Dream Life, helping ambitious people, like you, to grow a business they love.

 I’m Emma Hine and I’m on a mission to show you that it is possible to grow a business without sacrificing your life.

 Having experienced the rollercoaster of making millions of pounds, but feeling overwhelmed, anxious, and totally unsuccessful, I know first-hand the importance of growing a business on your terms.

 On this podcast I'm going to share with you lots of tips and advice that will enable you to grow a business that gives you the financial freedom to live the life of your dreams while sharing with you some inspirational growth stories from other fabulous business owners.

 Ready to live the dream? Then let’s get stuck in…

Hello & Welcome to today’s episode of Dream Business Dream Life.

 Whether your business is your main source of income or a top up income you want it to be profitable.

You know that famous saying turnover is vanity, profit is sanity well today I want to explore that.

 This is always a topic of conversation that creates a mixed opinion…some say you need to focus on turnover as without that you haven’t got a business; some say you have to focus on profit or you become a busy fool.

 My opinion you need to focus on both…as in general you would expect more turnover to lead to more profit but I am going to share a bit of a personal story with you as well that says that nothing is cut and dry and sometimes more turnover does not mean more profit…but no profit is pretty pants.

 Ok so let’s first be clear what the difference between turnover and profit is…in its simplest form turnover is the total value of all your sales; profit is the money that is left after you have paid all your expenses….the money you can effectively pay yourself or reinvest into your business.

 Now I have spoken about my ecommerce business a lot, so I am sure you know that I was overworked in that business; I worked all the hours which meant I was not spending any time working on my business…I just kept doing the same things; not analysing the data or looking at the bigger picture. 

 Working on your business is essential…it is not a nice to have…a lesson I really did learn the hard way.

So back to my story, I saw turnover rising; there was plenty of money left at the end of every month to pay myself and reinvest in new stock, systems etc, so I naively assumed all was good.

 But all was not good…unbeknown to me I had been selling a range of products for months at a loss. Now I am not taking a few pounds here and there I am talking thousands of pounds worth every single month.

 So, to put this into context I was buying the item, paying all the sales fees, paying a team member to pick and pack it and then paying for the postage and packaging and the price I was selling the item at did not cover that basic cost…never mind make me any money. And every time we sold out I ordered more and the process continued.

 Then another time our system had a bit of blip and a range of products got reduced to 1p with free postage and packaging…we shipped a lot before we realised. 

 You may be sat there thinking what idiots…who would do that…well I tell you now when you are so busy and have a lot of automation in place it is easy to not look at something you do not expect to ever in a million years be an issue…but I can assure you we soon put a process in place to stop it happening again….and we did some serious training with our team.

 Due to the volume of orders coming in neither of these things caused us a problem in the bank. We could still pay all the bills, we still had a great turnover, we could still pay ourselves a decent wage and so we simply did not spot it until we sat with our accountant, and he pointed out that our cost to income ratio had taken a bit of a tumble.

 I could not explain it…I made up a few possible reasons and left it there. I mean these things happen and we were aware some costs had risen that would have been part of the issue.

 A few months later when I decided to actually do a bit of work ‘on the business’ I started digging into the profit of some of the products wow, I was shocked, gutted, mortified even.

 This was the moment I discovered we were selling some of our products at a loss.

 I was kicking myself for not doing something sooner; angry that I had no time to work on the business and telling ,myself what a rubbish CEO I was…I mean what normal business would let this happen….turns out a lot do!

 But it was in that moment that I changed my approach to my finances, and it is why I always challenge my clients to look at their profitability. 

 So yes I paid for my mistakes but it gave me a great lesson in money management that I have since been able to benefit from personally as have many of my clients so I will take that as a positive.

 So, there’s a couple of things that having poor profitability leads to.

 The first is working so much harder than you need to and the second is not being able to pay yourself correctly...and who wants to work their socks off for no or little reward…honestly…nobody does!

 When did you last look at your profitability…I don’t just mean looking at the final profit figure on your profit and loss sheet…I mean actually looking at how your profit and loss is made up.

 You should have 2 financial targets; turnover and profit…I get asked all the time what a good percentage should be and the simple answer is I cannot tell you what the percentage should be as that really does depend on so many factors and varies from business to business but you need to get to know yours and you need to take into consideration that during a period of growth that may change as you may be reinvesting more…and that is ok.

 So how do you make sure you are as profitable as you can be?

 Well first things first you need to look at all your outgoings; are they needed, can any money be saved?

 Then you need to understand the profit for each of your products or services, I find a lot of people are spending all their time and effort on the least profitable offers because it is the one they sell most of. 

 Simply by switching that focus you could save time and make more profit…even if turnover drops.

 Yes that is totally possible, remember me telling you about my selling at a loss cock up well after that I deep dived into all our products and by stopping selling some of the ranges, yes we lost a chunk of turnover but we were able to cut costs and apply our attention to the more profitable ranges and our profit went up…as in we made more actual profit from less turnover….more money in our pockets.

 I also did this exact same process with a client, and she was able to save lots of time and increased her turnover by £5-7k per month which led to more profit and more time to focus on the next growth project…she is now smashing £10k months easily and getting time off…something she never had before.

 It is a bit of an uncomfortable process, but it can be a total gamechanger.

 If you are running your own business, even if you are not driven by money you need to be making money and that means making enough money to pay yourself not the vanity money that makes you feel like you have a business.

 Yes at first and when you are growing you may take a hit on that but that should not be a forever thing…if you are not paying yourself a wage right now…my first challenge is to pay yourself something every month…even if it is £50 as you will start to feel far more positive the minute you do and it will force you to stop wasting money as I bet you are doing that too if your profit margin is low.

 Of course, if you not getting the sales at all that is a totally different conversation but even if you are getting a few sales, you should be making profit. How you use that profit is your call but please do not keep putting yourself at the bottom of the list when it comes to spending it!

 Thank you for listening; see you next time…

You have been listening to Dream Business Dream Life with Emma Hine. If you want to know more about how I can help you to build your dream business and your dream life, then visit my website emmehine.co.uk. Until next time remember you really can have it all!