Sales Is Not Profit
Perhaps most people clearly know that Sales Is Not Profit. They don’t need to be told that one is not the other. But haven’t you seen or worked with people that seem to equate these two though they are totally different things? Maybe you didn’t realize that some companies chase sales so hard because they think that one automatically leads to the other and therefore more is more.
Over the last few years I have worked with several Companies that focused so much on Sales volume that they lost sight of the need to make a profit from those sales. In fact, many of the sales were marginally profitable and some were horrendously unprofitable. Money was lost.
The culprits in two cases were “segment managers” that brought new lines of business to the employer who happened to be a general contractor. These segment managers secured from $2.5 million to $4.5 million each in work for the company in less than one year. They were then responsible to manage their sold work. Neither was very good at controlling costs on their jobs. Neither was very effective at managing crews well. Both seemed to think that their projects were making money until being clearly shown that they were not. Fortunately for this company another segment was making very good money and they were able to weather the mistakes made in the two other segments. Had the sales in the two wayward segments not been made the Company would have made a half million more in net profit from the segment it killed.
The culprit in a third case was the CEO of a different Company, which was also a general contractor. He was ADHD and focused too much on securing more and more sales volume. Then he punted the service delivery to his VP of Operations while he ran off to secure even more sales in a totally different market segment. I think the VP had whiplash from the near constant changes in direction. Ultimately, they had to sell vehicles, downsize, etc. to try to save the Company. I think they ended up moving their office as well. This CEO could not be bothered to focus on selling what he could effectively deliver and vice versa.
The culprit in a fourth case was an estimator for yet another general contractor. He seemed to have an aversion to missing out on any potential sales. In this case the Company had a backlog of work 9 months long due to his sales prowess when they needed to be operating on a cycle with about 120-150 days of backlog. Why was this a problem? Because their customers were not getting jobs completed in the expected 120-150 days and the Company was tying up excess money in material inventory and bouncing their crews from job to job to keep customers at bay while not completing jobs. The monetary costs of these practices took a predictably heavy toll on profitability.
The biggest challenge for most start up companies is getting revenue, or more specifically, adequate recurring revenue. But once a company is sufficiently established or entrenched where it has a fair revenue stream, focus must shift from sales to profitability. If a job is marginally profitable or not profitable then it causes the company to tie up monetary and human resources that could be more profitably employed elsewhere. But getting sales junkies to accept that sometimes less sales means more net profit is a hard row to hoe.
CEO’s must establish guidelines for new sales. This includes capping the volume of sales that a Company accepts if they don’t have the bandwidth and financial depth to effectively deliver on a higher sales volume. And establish metrics and methods in advance of pursuing new lines of work to measure the profitability of what is sold to limit the probability that what is sold comes at a loss.