Warning signs - 2

We’re looking at the signs that may warn you that your business could have financial trouble ahead. The previous sign was people glazing over in meetings when finance is on the agenda. This time it’s about your sales people.

Try asking one of your sales people “Does 10% discount mean 10% less profit?”

If they answer “Yes”, you may have a problem. “Yes” means they’ll probably happily give 10% discount, knowing that the profit from the additional 20% or 30% boost in sales will far outweigh the 10% loss in profit per unit.

But think about it. If we make things that cost us 80, or we buy them in for 80, and sell them for 100, we’re making 20 profit. Giving a 10% discount means they still cost us 80, but now we’re only selling them for 90, which is only 10 profit.

The 10% discount here has cost us half our profit! We need to sell twice as many at the discounted price, just to stay in the same place that we were.

So what level of discount are your sales people authorised to give? How easily and quickly do they give away the discounts on order to win the sales? How much of the profit are they giving away?

There’s an old financial saying: “Sales are vanity, profit is sanity, and cash is reality.” Or as I say, “We don’t want our sales people to make sales, we want to be paid on time for profitable sales.”

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