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Push For 'Dough' - Not For Show!!

Do you know what makes profit in your business? Do you know the products and services that provide the cream? Do you know the customers that make you money?

Conversely are you aware of those products/ services and customers who are ‘draining’ the business? The ‘drive for show, putt for dough’ phrase often used in Golf Clubs (slightly changed in the heading above) is an old saying I know, but if you don’t know where your profits are coming from you cannot apply the appropriate strategies to optimise those profits and earn the ‘dough’ you require.

Imprinted in my mind is when I took over the management of a large FMCG business supplying major UK Retailers many years ago. At our first meeting the Sales team had great pleasure in telling me how well major Retailer X had done in the last year with sales to this customer going up from £3 million the year before to a huge £5 million – 'isn’t that a great result' they said.

Without dampening their enthusiasm (not a good start to make with a new team) I quietly suggested that we had a look at the numbers underpinning this ‘great’ achievement and I then got the Finance Director involved in analysing not only what we had sold to this retailer, but also the cost of those sales. Many things needed to come into the equation for this particular major retail organisation:-

  • The landed cost of goods to us with fluctuating exchange rates (goods bought in $ - Chinese manufacture).
  • Shipping costs from our UK Warehouse to them – cost of some deliveries refused.
  • Advertising costs – national TV advertising costs pro rata to the customer’s share of our business.
  • Promotional funds spent on obtaining instore display sites etc.
  • ‘Mark down’ monies.
  • Settlement discount and DSO’s – payment terms offered (they paid 90 days).
  • Cost of customer returns – returned to us by them after being on sale. These could not be reworked and resold, they were credited at full trade price to the retailer – this cost also included the administrative burden of dealing with these returns.
  • Customer catalogue contribution.

We completed the work for this customer (and all other major customers) and found that on Sales of £5 million when viewed at gross margin level (i.e. before Selling, General and Administrative costs) we LOST £500,000 with them in that ‘record’ year. On that basis I didn’t want another record year I can assure you!

If ever there was a message to ‘inspect not expect’ it was here. We dealt with this with an ‘open book’ policy to the customer who was visibly shocked to see our loss and said to us ‘you are joking’ to which we responded ‘sadly not’. The customer actively worked with us to make the following year profitable for both parties. The result was that we sold them £3 million not £5 million and made £500,000 profit!!

Our advice to all business owners and Managing Directors is this.

  1. Make sure you KNOW where your profits come from – which products/ services and customers are paying you back handsomely.
  2. Make efforts to further drive business on these products and services and with these customers but making sure that any additional spend doesn’t transform profit into loss.
  3. Deal with unprofitable products/ services – this doesn’t necessarily mean a cull – but it might.
  4. Think of other ways (for example) of improving product/ service profitability by changing the product materials or the volume of material used in the product to reduce the price and maintain your selling price. Is there something in the service you offer that means little to your customer but costs you a lot? A subtle change this could be acceptable to your customer and might not be missed at all.
  5. Sell a Price Increase – or even sell a part price increase on selected services or products where there isn’t much direct competition – every £ price increase falls straight to the bottom line.
  6. Tackle the matter with YOUR suppliers – can they help by reducing the price to you or offering better terms?  Reduction in cost of goods will make a difference.
  7. Deal with unprofitable customers. Being open might be the best way to achieve it. There is no benefit in a customer having a supplier that isn’t profitable because that will ultimately affect quality and service. This then affects the customer’s business negatively. If your quality and service is good tell the customer that to maintain it some changes need to be made.
  8. Always measure profit – if you currently don’t have a mechanism to break down your business and evaluate it at product/ service and customer level – get one. It could be your best investment yet and save you many £’000’s and a lot of wasted time and money for nothing in return.

That is the road to ruin for sure…….

For help and practical advice to help your business become more successful and profitable contact us at:ignite@tinderboxbusinessdevelopment.co.uk
 or call us on 0116 232 5231

Alternatively contact me directly using the details below.

David Turner

Managing Director

david.t@tinderboxbusinessdevelopment.co.uk

07747 023610

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