Thursday, 9 June 2011

When Profit isn't Profit

Yesterday's post generated some interesting responses, mostly positive but some questioning why I would air such thoughts in a public forum. It might help explain the rules of engagement I decided on when I set myself the challenge of writing one of these posts a day:

  • Be disciplined with the amount of time I spend writing each post (I try for under 30 mins)
  • Be open and honest (it saves a lot of time in business and life)
  • Avoid being too self-censorious around what I was revealing
  • Not worry too much about how my thoughts might be received
Hopefully by conforming to theses rules I will manage to generate one of these a day and (although quality and style will inevitably vary) maybe from time-to-time I will  "inform, educate and entertain" (if those Reithian objectives are good enough for the BBC, they're good enough for me).


The topic of  "When Profit Isn't Profit" is one I expect I will return today but today's "Top Tips" are specific and simple (and aimed mainly at new businesses that have to invest in stock)

  1. You won't know how much profit you are making until you have turned your stock.
  2. Discount Deep, Discount Early
If these are statements of the obvious to you there is no need to read on; otherwise ...

As covered to some extent in my Amazing Balancing Act post (and you likely understand already), when you spend money on stock it goes on your balance sheet but doesn't touch your Profit & Loss (P&L); it affects your P&L as and when you sell it.  This means if your stock is unsaleable at your expected sales price, *when* you come to sell it you will generate far less profit than you have on the freely selling stock that generate your early sales. Typically this means in the first 12 - 18 months businesses over-estimate their true profitability because they have stock that has not fully turned (i.e. items that have never sold-through and been re-bought); only when these items are sold (the stock is 'turned') do you see the true profitability of the business.  Of course you would expect to get better at knowing what to buy and therefore improve your profitability over time, but most businesses inevitably have some material level of 'failed' stock.

As a related point there is another mantra which is often heard in our offices: "Discount Deep, Discount Early".  In effect this means if mistakes have been made on stock purchases (they inevitably will from time-to-time) then recognise it and deal with it by moving the stock on.  As a crude rule of thumb we reckon that pretty much anything will sell at half-price --- better to go straight to 50% off and move the stock on so you clear stock space, generate some sales buzz and don't kid yourself that you are making more money than you really are.

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