Follow Robert Linkedin Facebook
Email Robert Email
Business Growth
Oct 1, 2014

When Should You Walk Away From A Sale?

Sponsored Content provided by Robert Rickert - Founder/President, Robert J. Rickert, CPA, PC

When your business is just getting off the ground, or fighting for territory, any sale feels like a good sale. When you sell something to a client or customer, that means money is coming in to your business, right? And money coming into your business is what pays your employees, covers your payables, and keeps the lights on.

My firm often works with business owners who can’t quite figure out why the money that their salespeople are bringing in is barely enough to keep the business afloat – if that. When I look over their books, I can usually quickly identify one, if not several, reasons a business is struggling. And a lot of it has to do with how a business looks at sales.

Too many business owners chase revenue without regard for margin. Don’t get me wrong, sales are great but you have to be just as (if not more) focused on your margins. In the business world, there are several different kinds of margins, but when I work with my clients the one I focus on is gross margin. Gross margin is what is leftover from your sales once you deduct what it cost you to make those sales. It does not take in to account your overhead expenses (rent/utilities/insurance, et cetera).

If you’re a reseller, this could be called markup. If you are in a services business, like I am, your gross margins must take into consideration your people costs, including salaries and benefits.

Operating with low margins may seem like a smart move if your business plan is to beat your competition on price. And if you sell a large volume of product or services, this can work. But there’s a flip side – low margins can seriously affect cash flow if customers are slow to pay. Here’s a simple example:

Suppose you sell books and give your customers five days to pay. You, however, must pay for the books immediately. You buy a book for $9 and you resell it for $10. So your gross margin is $1 per book sold. Remember, that’s your profit before you pay overhead. Now suppose that a customer does not pay you (or pays very late). You now need to sell nine extra books just to pay for the one you were stiffed on, and those nine sales don’t count at all toward your bottom line.

Use the same scenario, but now suppose you bought the books for $5, so you had a $5 gross margin. Now it only takes one extra sale to cover the $5 your customer has not paid on time. Not nearly as damaging.
Taking on even more low-margin business in an effort to improve your cash flow can compound your problems. Now you have more sales, which means you need to hire more salespeople or technicians or installers or whatever the term is in your field. You may need a larger facility that requires more insurance and electricity and telephones. All of these costs add to your overhead. If these new customers are slow to pay, you can find yourself out of cash very quickly.

So are all sales good for your business? Absolutely not.

All business owners must have a minimum gross margin that they are willing to accept. If a potential sale does not meet that margin, you must be willing to turn it down. It may be tempting to bend your rules just this once, but know this: selling too much and growing too rapidly can bankrupt a company just as fast as not selling enough. That means all your hard work to get those low-margin sales and satisfy your customers will mean nothing in the end. Nothing.

So know your gross margins. Set your minimums. And don’t look back.

Robert J. Rickert CPA, PC focuses on giving its clients timely, accurate and relevant financial information to help them make informed decisions about their businesses. The firm provides customized solutions to meet the specific needs of its clients. Services offered by the firm include CFO and controller services, crisis management, interim financial management, acquisitions and business buying, divestitures and business selling, litigation support, business tax services, and tax dispute assistance for individuals. For more information, visit rickertcpa.com, call 910-319-9127 or email [email protected].

Rickert insight 14oct
Ico insights

INSIGHTS

SPONSORS' CONTENT
Burrus rob headshot 300x300

Are You Blockchain Bound?

Robert Burrus - Cameron School of Business - UNC-Wilmington
Yasminheadshotwithlogo

Word Power

Yasmin Tomkinson - Cape Fear Literacy Council
Aaeaaqaaaaaaaaidaaaajdhiztrkodm0lte2yjetngrkmy1hotrmltawmdvlmwqyztmymw

Understanding the AI Ladder

Diane Durance - UNCW Center for Innovation and Entrepreneurship

Trending News

Flooding Looms Along Water Street In Downtown Wilmington

Christina Haley O'Neal - Sep 24, 2018

Open For Business: New Announcements (Sept. 24)

Johanna Cano - Sep 24, 2018

At UNCW, Crews Clean, Repair As Officials Plan For Return Of Employees, Students

Cece Nunn - Sep 24, 2018

In The Current Issue

State Releases Visitor Spending Data

Visitor spending increased in Pender County for 2017, with a growth rate that outpaced Brunswick and New Hanover counties, and even the stat...


The Future After Flo

Hurricane Florence will go down in history as a disaster that tested the ability of a hurricane-prone region to cope. Even before Hurricane...


Scenes From Hurricane Florence

Images from the area ahead of and in the aftermath of Hurricane Florence....

Book On Business

The 2018 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2018 Power Breakfast - Dishing on the Restaurant Biz
2018 WilmingtonBiz Expo - Keynote Lunch with Eric Dinenberg, Rouse Properties
2017 Health Care Heroes