Sales & Profit
There are only 4 ways to increase profitability:
- Increase prices
- Grow sales volume
- Decrease direct costs
- Decrease indirect costs
You might assume that strong financial management is needed for each of these 4 paths, but you’re only partially correct…
A quick story…
I was chatting with one of our clients recently, we’ll call him Jimmy. We work with plenty of ambitious entrepreneurs, but Jimmy is on the upper end of the spectrum… his service business grew from $0 to $2m over the past 18 months.
He’s a “sales first” operator which plays a big role in his rapid growth.
Working with him is like getting a masterclass on sales & marketing tactics (a skill sorely lacking in my simple finance brain). Which had me thinking…
Financial management, and therefore profitability, does not exist in a vacuum.
You need an effective system for EACH of marketing (finding prospects), sales (converting prospects), operations (service/fulfillment), and finance. And once you have an effective system for each, you need to “connect” them together.
It looks something like this (excuse the crude doodle):
The green shaded area is what I call the “Profit Zone” where all areas of the business are working together to create maximum earnings.
Let’s start with just the sales / marketing / finance (blue shaded area) circles.
1) The intersection of sales and profit
Sales & marketing are your methods for finding and converting prospects into paying customers. Finance (and profit) turns those paying customers into net profit for reinvestment or distribution.
What does a business look like when one of those pieces are missing?
Sales without finance
Say your business has a “selling mantra” where business development is your core competency.
Two scenarios come to mind which could make this a disastrous setup:
- New customers are onboarding at low-or-no margin (or, gasp, negative margins!)
- Revenue is growing so fast that working capital can’t keep up (the inventory needed to make the sale and/or collecting on the sales you’ve already made)
Both scenarios can lead to business failure. Sales are good, but you don’t want them at the expense of finance.
Finance without sales
On the other end of the spectrum, your product margins are dialed-in and you’ve designed the business for maximum profitability. The only thing you’re lacking are customers and clients to turn a profit.
Imagine a well-thought-out business model with plenty of analysis, but no inbound or outbound outreach.
This is an equally disastrous scenario with your team sitting around waiting for customers to serve.
2) Your sales & marketing “system”
The solution is to build a sales & marketing system.
How do you build an effective system for sales & marketing? Let’s start with a few probing questions to steer you in the right direction:
- What’s your plan for increasing sales over the next year? How about increasing customers?
- Where are you going to find new customers?
- How do you plan to keep the customers you already have?
- Do you have a sales team or any sales reps in your business?
- Are you spending money on advertising (Google, Facebook, TV, radio, print, etc.)?
- Are you spending on direct mail (flyers, postcards, etc.)?
- Are you gathering referrals?
- Do you view sales & marketing dollars as a cost or an investment?
- Do you know how much incremental profitability an additional dollar of sales creates?
- What was the ROI on your sales & marketing spend last year?
By now you’re probably getting the hang of this.
A business needs sales to create more revenue and sales needs financial management to ensure those sales dollars are profitable.
There are 3 parts to “connecting” sales with finance:
- Setting sales & marketing strategy — who, what, why, when, where (and how)
- Measuring sales ROI — efficiency and efficacy
- Using data to drive decisions — the “feedback loop”