Turnover vs. Profit: What Really Drives Growth
Understand turnover vs. profit, by delving into the crucial relationship between turnover, gross margin, and profit in business. Understand why simply expanding sales (turnover) isn’t enough and how focusing on profit and cash flow drives sustainable growth.
Video Transcript
So, I think one of the oldest adages in the business book is that turnover is vanity, profit is sanity, and that cash is king. So, when somebody says that they want to grow, they generally mean they want to expand their sales. But I need to understand why they want to expand their sales. Expanding sales on its own has no merit in my view. Expanding sales is great if with it comes a greater gross margin and greater profit. Now, within any bracket of overhead, if you grow your sales, the likelihood is you’re going to generate a higher gross margin once you’ve broken even. A higher gross margin drops straight to the bottom line; in other words, you’re going to increase your profits fast. But one needs to understand the relationship between turnover, gross margin, and operating profit before simply going out and seeking to grow. You’ve got to know why it is you’re growing, what it is you’re seeking to achieve when pursuing growth through enhanced sales volume.
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