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24 July 2009


I keep this saying "Turnover is vanity, profit is sanity and cash is reality" on a little post-it sticker by my computer to remind me to look beyond the size of the order or enquiry and focus on

a) the profit I am making on the transaction - which also helps me to think about whether it could or should be bigger

b) collecting the cash which helps remind me that terms matter and the bigger the order, the less risk I should take on credit.

Joan I like the way that you have taken the phrase and put the sentiments into practice.

Turnover is vanity story

In one of my first jobs, I worked for a start-up tableware and silverware business and things were tough.

The marketing director managed to "win" a big order from a mail order company that advertised in newspapers but the margin was only 10% (when we had budgeted an average of 40%), we got a lot of stuff returned as unwanted and damaged and they took about 120 days to pay.

I was able to show that we made a loss on it and how our cash flow was never positive.

It was a great example of turnover is vanity, profit is sanity but cash is reality.

You are right about managing the credit risk on big orders, especially when businesses are obviously struggling in the recession.

If you don't get paid, you are worse off than if you had never had the order in the first place because you have lost the cost of the goods.

Another good blog Paul.

I am an accountant and I keep using the "turnover is vanity profit is sanity" saying to my clients.

Too many people try to build a sales by cutting volume not realising the terrible effect it has on profit.

For example a business that has a 30% margin which cuts it price by 10% needs to increase sales by 50% just to stand still in profit terms.

And that is before they worry about the cash consequences of more stock and more debtors.

In the golfing world there is another saying that links into this "turnover is vanity, cash is sanity" theme.

It goes like this

"Drive for flash but put for cash"

It reminds me that it's not how you start that really matters but how you finish.

I am not a golfer but you can see the same theme come through in the fable of the tortoise and the hare.

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