Make sure that your margins make sense. Giving away your product or service will never result in a profitable operation. It might work as a short-term start-up strategy, but it won’t keep you running long-term.
I am by no means a financial expert. Let’s just get that out of the way. What I can tell you is that making sales is not the same as making profit. I’ve spent years and many businesses trying to persuade myself that I had a viable business when I wasn’t paying myself a salary or I was working out of my mom’s dining room.
The very subtle and often misunderstood difference between three key terms can quite literally sink your business. You think you’re making money but you’re spending it as quickly as it’s coming in and your business model is broken.
The simple thought that should be in your head is that you should be selling something for more than you purchased it. So much more that if you sell enough of this product you’ll actually make a tidy profit after all of your expenses.
The very first and most important thing that any business needs once there is a product, is sales.
It’s pretty important to understand that if you aren’t making sales, your business isn’t going to be profitable, ever. Sales lead to income and hopefully income leads to profit.
When I started out in business I thought the equations were simple. I made a sale, I did the work, I was paid for the work and then I had money in the bank. In an ideal world, this is exactly how it should be. But it’s not that way at all.
Your sales equate to your turnover. Turnover is the money that came into your business through sales, as is, no strings attached. If you sell something for R200 then your turnover is R200. Simple.
Making and spending money
Things get a bit tricky when you talk about gross profit. Everything that is sold — time, products, anything — has a cost. If you buy a product at wholesale for R100 and sell it for R200, your turnover is R200 but your gross profit is R100.
Your cost of goods sold (COGS) or cost of sale (COS) are the two figures you use to calculate your gross profit. Turnover minus COGS/COS equals gross profit.
Gross profit is a dangerous term because it can mislead entrepreneurs. You think that the word profit in there is meaningful but it isn’t yet. It’s just a reflection that the product you make, buy or sell is actually being sold for more than you purchased it. This is a decent start but still not the whole picture.
This is the Holy Grail. Net profit is the one that matters. It is using all of your expenses. This is the figure you are left with once you minus all of your expenses. Your bandwidth costs at the office, your rent and everything inbetween. If you are making a gross profit of R100 at the end of the month and all of your expenses equate to R50 then you are left with a net profit of R50.
It’s important to take all of your expenses into account for net profit. You cannot be a profitable business if you aren’t paying yourself a salary, or accounting for rent. You get the picture.
Why this all matters?
You’re a start-up and you are making a huge amount of sales each month. Your bank account looks and feels full. The money keeps flowing in but you don’t notice that the money is flowing out just as quickly.
Your cash flow is killing you and you aren’t focused on it. You’re focused on top line revenue, your turnover, when you should be looking at the bottom line, your net profit. That’s the line that keeps your business in business. If the money is leaving your account faster than it’s coming into your account you are burning cash.
Related: How Smart Managers Drive Profits
If your cash burn exceeds the amount of money in your bank account, you are technically out of business. That’s why this terminology matters. They aren’t just words, turnover, gross profit and net profit can keep you alive or quickly destroy your company.
Why Purpose Drives Profits
If you want to succeed, it’s time to start engaging where it matters.
Over the past two years, many clients have been extending brand positioning exercises into purpose-driven expressions.
When we look at it, it makes sense given the country’s demographics. With many of our fellow countrymen struggling to make ends meet, brands have stepped in to provide them with a picture of a future worth striving for.
Global customer-centricity study, Insights 2020, led by research firm Kantar Millward Brown, has attempted to understand how brands could drive customer-centric growth as well as the factors that really make a difference. The research surveyed 10 495 individuals in 60 countries, and there are some significant efforts worth investing in if brands want to engage where it matters most, in consumers’ hearts.
The research uncovered that for market-leading companies and brands, traditional value drivers such as quality, packaging, or distribution are necessary, but no longer provide a competitive advantage; most brands are capable of providing these drivers. What is important, are a few critical approaches.
1. Purpose-led brands
The study found that when companies or brands linked to a purpose, 80% of them outperformed the market. Only 32% of non-purpose led brands managed to perform better than the market.
Related: How To Calculate Gross Profit
2. On the ground
It’s important to engage with consumers in their space and on their terms. Through the use of memorable campaigns, experiential events and activations it is critical to engage with consumers on their turf.
3. Be truthful and authentic
Consumers can smell something inauthentic a mile away, especially when it’s coming from a brand. This forces brands to strive for authenticity in everything they do, especially when it comes to marketing. Building values and principle-based attributes into your brand as a guiding tool is essential.
4. Helping consumers commit
By allowing individuals to attach themselves to a brand with a purpose, it helps consumers personally commit to a cause that they consider important. When a consumer is personally invested, the link between the brand and product or service deepens.
5. Balancing heritage and modern relevance
There is a continuous tussle in balancing the traditional market, transitional market and the new consumers brands are trying to attract. Keeping the heritage and roots of the brand true to itself, while creating relevance for the new market, is a battle marketers are still fighting.
Need To Trim The Fat To Boost Profitability? Listen To Your Clients First
Jeff Bezos believed that once you win the client over by doing this, everything else will follow – not least profitability.
Finding the balance between offering the extras that set you apart from your competitors and keeping things ‘lean and mean’ to minimise wastage and maximise return on investment is a tricky balancing act.
I’ve noticed that many businesses try to attract or retain customers by offering what they think their customers want, rather than finding out what they really need, and then delivering that. That’s an expensive mistake to make – and it’s not going to achieve the business results you need.
I’ve also observed that now is the age of the new entrepreneur – the game changers who disrupt the status quo long set by big bureaucratic competitors who think that their customers will just accept an inflationary (or slightly larger) increase every year, just because they always have.
While Amazon has been around for a while now, there’s also an important lesson to be learned from its launch goal, which was to bring the price to the client. Jeff Bezos believed that once you win the client over by doing this, everything else will follow – not least profitability.
How have I applied these lessons in my business?
Firstly, we design our hotels backwards – we focus on the needs of our clients, very aware that what hotel guests wanted years ago is not what they want now. That’s why we don’t offer thing like a turn-down service with chocolates on the pillow. Nobody eats the chocolates, and nobody uses the toiletries – so why should we include the costs of these unwanted extras (and the cost of the staff required to implement them) in the final bill to our clients?
We do, however, offer free WiFi internet connectivity, free parking in our buildings, free laundry services and either bed-and-breakfast options or self-catering rooms.
Simply put, we’ve cut the fat that nobody wants anyway, and added the value that our guests have said they expect.
Our clients have said that they expect the whole hotel to be a workstation, and not just the business centre in a dark, unwanted corner. So, we’ve put a workstation in every room, with always-on access to the internet. Our hotels are designed with beautiful work spaces that cater for nomadic entrepreneurs and double up as comfortable meeting spaces, again – gone are days of boardroom only meetings, our spaces are primed for work and play in one integrated space.
Our clients have pointed out that they’re already paying for their room – so why should they pay for parking?
Many of our clients stay with us for days or weeks at a time, and have said it would be helpful if we did their laundry. So, we do that for them – and we don’t charge them for it.
It’s true that many of our old-school competitors offer a broader range of products and services than we do, but we’ve built a successful business on adding the value that our clients need, removing the costs and extras that annoy them, and keeping costs (theirs as well as ours) under control by cutting out unnecessary frills.
It’s an approach that’s worked for The Capital Hotels and Apartments as a disruptor in the hotel and long-stay accommodation industry, and I’m confident that its principles would apply to any other industry that’s ripe for disruption.
If You Want Scale, Fail Fast And Learn Quickly
Mindset, focus and an understanding of scale are essential if you want to build a highly profitable, growing business.
“The secret to scaling a business is increasing revenues without incurring a corresponding increase in operating costs,” says Tom Asacker, author of The Business of Belief, Opportunity Screams, A Little Less Conversation and A Clear Eye for Branding, all groundbreaking books that redefine business and communication for the new age of abundance. “The single most important challenge is to have a deep understanding of your value creation and customer attraction and retention process, as well as how the company will ultimately make money over time through the unique realisation of that process.”
According to Howard Sackstein, founder of Saicom Voice Services, scale used to be measured by the number of people you employed or the number of branches you opened. “Today, these questions have become irrelevant,” he says.
“When Whatsapp was sold for $19 billion the business had only 55 employees servicing 450 million users who were sending 34 billion messages a day – that’s a tiny company with enormous scale. So, today scale has come to mean something very different. In the new economy, scale is about scalable technology, how do we build software and apps that can cater for a billion users? The ideas of lots of employees and lots of offices has become old fashioned.”
The problem is that scale comes with costs and that’s why money is often the enemy of entrepreneurship. “Many of the great businesses of the new economy all began in garages, a small group of people, each with real skills each trying to bootstrap an idea to see if it worked,” continues Howard.
“Often people go looking for funding; there’s a problem there too though – they scale too fast once they receive the cash and ultimately they fail because they have too much money. Entrepreneurs need to start small and if they fail they must fail fast. They need to test the market and grow incrementally to prove their idea. Once the idea has achieved a degree of adoption and has ‘crossed the chasm’ of technology adoption, only then can you start thinking of scale. And today scale means few costs, few employees, and tech that can scale to a mass market.”
Your Mindset is Everything
Your mindset while scaling is critical. “Value creation, customer attraction and your retention process are the result of every decision you make as an entrepreneur,” says Tom. “Your mindset shapes how you make these decisions.
“Every rand spent should be to add value in the eyes of the customer, or to improve the process that delivers that value, through automation, distribution, channel partners and so on.
“If businesses aren’t hyper-focused on adding value and deepening relationships with customers, someone will come along who will. If that happens, whether or not that process produces rapid growth is beside the point.”
Howard believes that follow-through is also essential. “So many people really want to build empires,” he says. “But how do you measure your success? Is it the number of employees you have, the number of companies, your disruptive influence on the market, revenue or actual profitability?
“You really need to decide this up front and that will affect your strategy. I probably have an old school mentality, but for me profit is everything. I don’t really understand the idea of focusing on scale with no business model in the hope that on an exit someone will find value. I know that’s a common idea in the tech world and you could get lucky by following it, but I think there are few people with that degree of luck – build for profit and sustainability, build as lean as possible and keep your eye on the actual ball.”
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