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Business Finances: Turnover vs Profit
There's a common misunderstanding of what is income versus profitability within business. In this video we cover the difference, the common thing that we see amongst business owners, and the wrong focus they've had when it comes to their goal setting of turnover and profitability.
What is turnover, or what is sales? Turnover and sales is the money that's come into the business. It's the money that you've provided the good or a service. It's been sold to someone, and they've actually paid you. You might hear business owners say, I've had $500,000 turnover business. It means I've had $500,000 worth of sales in any given period.
When it comes to the profitability, that's actually the income less the expense to make the income. It's the money left over at the end of the day. If a business is doing $1,000 worth of sales this week and it costs them $750 to do that, this week they made $250 profit. Do that over a month or a quarter or a year.
When it comes to business owners, a lot go, hey, I did $300,000 this year. Next year I want to do $500,000. That's their goal. In our whole time, we've never met a business owner who has come to us and said, this year I have to make $100,000 profit. They've never given that attention where business goes. No matter what I've got to do in sales, I have to make $100,000 in profit this year. That's why business owners only break even or make small profits. Their mindset is not attune to how much profit they want to make in a year.
Once they work out they want to make $100,000 and know it costs them $600,000 to actually make that $100,000 profit, then they know they've got to do $700,000 in turnover. Instead of working at the turnover to start with, they're actually working in reverse engineering everything. They're working at the profit before they even work at what sales have to be and become a profit driven business.
We actually have someone who joined our program, and to begin with, they were all focused on making the sales and the prestige of doing certain jobs. They couldn't understand why they were not making any money. They were doing fantastic work and were working with some awesome clients out and doing some really good work, but they were making no money. It's because their focus was how can we make sales do really prestige work? The thing they forgot was how do we do some fantastic works for some fantastic clients and actually be profitable in the end of the day? It wasn't until they actually shifted their thinking and their mindset to be able to go, okay, how much profit do I actually want to make in this job? What's the profitability percentage for this job? And in the end of the day, the month, or the quarter, or the year, how much profit do I have to make within my business? And it might seem complex, but it was this shift in thinking that took this business from a $6,000 loss in one financial year to nine months making $30,000 in profit. It's because they started to still do the work they love, still do great work, they never compromised on the work, but the focus and intention was actually turning profit back to the business. And there was that shift in thinking to shift away from just sales to think about sales and profitability. They started picking and choosing which work they didn't do because if someone came to them and said, I want to do this. Can you do this work for us? They looked at it, quoted it up, and there was no margin in it. They didn't do the work, because what's the point in doing the work, and they're actually running for free? It's a bit like being a charity. They're doing the work for nothing and making no money. They're slaving their guts here, working 50-60 hours a week and making no money. And so it was a shift in thinking to still think about turnover but the focus and attention went to how do we do good quality work, but how do we be profitable in the work we do? And they made the decision on the percentage of profit per job they had to make, and they made that decision on how much profit do I have to return back to the business month in, month out within my business?
So the main area is, remember, don't just focus on turnover. Make the decision of how much profit must be made in the business in every given period. Then reverse engineer it to be able to work out what's my sales I have to do from there. Then that gives sales targets and gives you focus on what leads have to come in to make that sales, to pay those bills out, to make the profit in the end of the day in the business.
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