Where Is All the Money Going Series: Chapter 2 - Turnover Is Not the Goal
Written by: Melissa Cunliffe (CA)
Are you actually making enough from what you sell?
There is something exciting about seeing turnover grow. It is visible. It is measurable. And in business, it is often treated as a sign that things are moving in the right direction.
You might hear someone say, 'We've grown from $2 million to $3 million,' or 'We've just had our biggest month ever.' On the surface, that sounds like success. Sometimes it is. But turnover by itself does not tell you whether the business is actually becoming stronger.
A business can grow revenue and still make less profit, struggle for cash, increase debt, place more pressure on the owners, require more staff and equipment, take on more risk and ultimately create less value for the family.
| How much are we actually keeping from what we sell? |
More Sales Can Hide a Bigger Problem
Growth can create a sense of momentum. More work is coming in. More people are needed. The phone is ringing. Orders are increasing. The team is busy. But if the margin on that extra work is too low, growth can magnify the problem.
Sales growth should never be looked at in isolation. It must be considered alongside margin, cash flow, debt, capacity and risk.
What Is Gross Profit?
Gross profit helps answer a simple question: after paying the direct costs of making the sale, how much is left?
If a business sells something for $100 and the direct cost of delivering that product or service is $70, the gross profit is $30. The gross profit margin is 30%. That $30 then has to help pay for everything else: administration, rent, management wages, insurance, software, vehicles, finance costs, marketing, professional fees, tax and ultimately the return to the owners.
How Turnover Affects Your Gross Profit Margin
Consider a business turning over $3 million. At a 30% gross profit margin, it generates $900,000 of gross profit. At 35%, it generates $1,050,000 — an extra $150,000 without increasing turnover at all.
| Sometimes the better question is not 'How do we sell more?' but 'Can we make more from what we are already doing?' |
Are You Pricing for Profit — or Just Pricing to Win the Work?
Family businesses can be vulnerable to underpricing. The owner wants to look after customers. They know the market. They worry competitors will undercut them. Or pricing has simply evolved over time without ever being properly reviewed.
The danger is that costs rarely stand still. Wages, superannuation, insurance, fuel, rent, materials, software and interest all move. If prices do not move with them, the margin gradually gets squeezed.
Not All Revenue Is Good Revenue
Some customers generate a lot of sales but very little profit. Some jobs consume enormous management time. Some products tie up cash in stock. Some customers pay slowly. Some work creates warranty problems or rework. Because the sales number looks good, they can appear valuable when the commercial reality is different.
Revenue quality matters. High-quality revenue tends to have healthy margins, reliable customers, predictable demand, timely payment, low complexity, manageable risk and limited reliance on the owner.
The Labour Question
For many service, trade, construction and professional businesses, labour is one of the largest costs. The question is not simply what you pay an employee. The true cost can also include superannuation, workers compensation, leave, payroll tax where applicable, uniforms, vehicles, tools, training, downtime, administration and non-billable hours.
If the business charges customers based on a labour rate that does not properly recover these costs, it can appear busy while gradually losing margin.
Discounting Is More Expensive Than It Looks
Suppose an item normally sells for $100 with a direct cost of $70. Gross profit is $30. Reduce the price by 10% to $90 and gross profit falls to $20. The selling price fell by 10%, but gross profit fell by 33%. The business now needs significantly more volume just to generate the same gross profit as before.
| Discounting should be a commercial decision, not a reflex. |
The Owner's Time Has a Cost Too
Owners often work enormous hours without treating their own time as a real cost. A business can show a healthy profit, but if replacing the owners would require substantial salaries, the true return on ownership may be lower than it first appears.
| Separate the reward for working in the business from the return for owning the business. |
The Numbers You Should Be Watching
Sales
Gross profit
Gross profit margin
Net profit
Labour cost as a percentage of sales
Average job or transaction value
Revenue by division or product
Debtor days
Stock turnover
Operating cash flow
No single number tells the whole story. Together, they begin to create visibility. And trends matter more than isolated numbers.
Ask Yourself
Do you know your current gross profit margin?
Do you know whether that margin is improving or declining?
Do you know which products, jobs or services produce your best margin?
Do you know which customers are genuinely the most profitable?
When did you last properly review your pricing?
Are supplier and wage increases being passed on appropriately?
Are you recovering the true cost of labour?
Do you understand the financial impact of discounts?
Does every division of the business actually make money?
Does the business adequately reward you for the hours you work?
If sales grew by 20% next year, would profit grow as well?
Would the business have enough cash to fund that growth?
| If you cannot answer some of those confidently, the opportunity may not be to chase more sales. It may be to understand the sales you already have. |
3P'S FUTURE PROSPERITY INSIGHT
PRESERVE
Preserving starts with keeping more of the value the business already creates. Understand margins, pricing, labour recovery and where profit is leaking away.
PROTECT
Low-margin growth can increase risk: more staff, more debt, more stock, more equipment, more customer exposure and more fixed costs. Healthy margins provide a buffer.
PROSPER
Strong margins create choices: invest, reduce debt, reward employees, build cash reserves, purchase assets, fund retirement and pursue opportunities.
| Before chasing another million dollars of revenue, ask: How can we make the business we already have more valuable? |
Book a meeting with Future Accounting to step back, look at the numbers and identify where your business can improve its profitability, cash flow and long term value.
Because the goal is not simply to sell more. It is to build a business that is worth more.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
