The main goal that every entrepreneur seeks in his business is to increase his sales. Sales are what move the company, position it in the market and are the reason for its existence. But, even more important than sales growth, is that those constantly increasing sales also generate profits.
Not always more sales, they are more profits. Many businesses that sell millions have gone bankrupt. I call that "the irony of growth."
What I mean by this? Several things:
1. The entrepreneur must seek growth in sales.
2. The entrepreneur must be vigilant for these sales to generate profits.
3. The entrepreneur must know if those profits are being converted into cash flow.
4. The entrepreneur must know if that cash flow is turning into wealth.
I repeat. Not always more sales are more profits. And not always more profit is more wealth.
• What happens is the following. A company is created to generate wealth. Point. Wealth manifests itself in three stages:
• First, the invested capital must be recovered.
• Second, the investment continues to generate profits for the rest of the life of the project. These earnings must have the ability to be converted into cash flow.
• Third, that cash flow in turn is reinvested in the growth of the business itself, creating a larger company. Although the entrepreneur could also take those cash flows and invest them in other companies, real estate or other investments.
How do you know if sales are generating profits?
It is necessary for the entrepreneur to know in depth the profit potential of each of his products. What do i mean
• You must know, weekly, sales by category or by product line. You should have a goal for each category or product line's share of total sales.
• You must know, weekly, your daily sales, the number of tickets or invoices issued and calculate the average ticket. You must have a daily goal for your average ticket.
• You must always have, updated, an electronic sheet that shows each and every one of your products or services for sale. For each of them you must know the following:
- Net Unit Sales Price
- The variable cost of purchase or manufacturing
- The variable cost of selling and distributing it
- Commission rates on credit card sales and the government withholdings on such sales.
- The discounts that are usually applied on that product.
- The contribution margin of each product.
- The percentage of participation of each product over total sales.
To my consulting clients, I establish the discipline of requesting a monthly report on sales that shows the contribution margin generated by each product. It is a fundamental report to make decisions. It tells you the following:
- The total value of monthly net sales (without discount and without credit card commissions) of each product.
- The variable cost of purchasing, manufacturing and marketing of each product.
- The contribution margin of each product in absolute terms and in percentage terms.
When an entrepreneur has this information in his hands, he has a powerful decision-making tool. You can decide which products are not contributing to profits, which products should be stimulated, which products should be adjusted in price or cost. And many other vital decisions that will allow the entrepreneur to have a business that generates more sales, more profits and more wealth.
I await your comments and queries on this topic. Remember, our mission is to support, train and advise you to build more profitable businesses.
