How to turn a bad business into a good business
We recently completed a year’s accounts for one of our bookkeeping clients.
This time around, I noticed that his turnover had shot up from R1m to R4m. Seemed like things were going well. Until I looked closer.
- His net profit dropped from R53K to R47K, so he was doing four times the amount of work for less profit.
- On R4m turnover, he should be making at least 8% profit which is R320K, but he was making about 1%.
- His Gross Profit (the difference between sales and purchases) was 20% of turnover for both years, which is about a half of what it should be.
- Because of the four times growth in turnover, his salaries had increased four times. from R81K to R351K and he was still only paying himself R10K per month.
- He had to rent premises, so the rent and rates increased from R19K to R176K.
- And so on all the way down the Income Statement.
What was he doing wrong?
- He was growing his company on bad business instead of on good business.
- It would have been better not to have grown at all, especially as he had leapt over the limit that required him to register as a VAT vendor.
- Clearly, the problem was in his selling prices. We needed to find a way to increase his average markup from 25% to 67%. That would get his Gross Profit up from 20% to 40%.
- Why was his markup so low?
- We had a Zoom meeting and I learned that he had two kinds of client.
- The one kind were National and therefore had huge buying power. They squeezed their suppliers mercilessly.
- The other kind were individual companies who appreciated his top class quality and service and were prepared to pay reasonable prices.
We set out a strategy to gradually increase the good business clients and reduce the bad business clients.
I find it very satisfying to help people along the road to success and that’s why I offer unlimited free Zoom meetings.