When Can a Sale Be Toxic to Your Cash Flow and Profit?

Everyone wants to make more sales and in turn increase their cash flow and make a profit. But how do you manage your sales people with the delicate balance between sales and profit and cash flow? How can you prevent them from making a toxic sale? Many businesses both large and small, focus just on sales as it is easy to focus on just one thing for their sales people. However if the sale is not profitable or has a negative impact on your cash flow, then the sale may in fact be toxic to your business.

Imagine this scenario. Sales are down so far this month and your sales people know it. One of your sales people, let us call him Harry, has been speaking to a new customer about buying your products however price has been an issue. Harry wants to make his sales target for the month and offers the customer a discount if he buys today. The customer is still not certain and hesitates. So Harry closes in and offers extended terms i.e. pay us in 60 days rather than 30 days! The deal is done. A special price and extra time to pay.

On the surface this looks OK, a pat on the back for Harry! He has made his sales target. Or is it really OK? In some cases depending on the level of discount Harry offered, the sale maybe profitable. So tick the box for profit.

Can the business wait 60 days without getting the money in the bank? For some businesses this may have little effect. So tick the box for cash flow. For other businesses waiting that extra 30 days may put severe pressure on the cash flow. So untick the box for cash flow. So sales are up, profit is OK but cash flow maybe an issue.

In other cases, the level of discount offered may make the sale a losing sale rather than a profitable sale. You may have heard of a loss leader sale where a business (usually retail) offers a product or item at a very low price just to get people to come into their store. A good strategy if the business can afford it overall. But what if the level of discount that Harry offered was actually at a loss. He sold the products for less than the product cost. He has offered an extra 30 days to pay. Let us hope he checked the customer’s credit and they can pay in 60 days.

So the worst case situation could be sales target made, sale made at a loss and cash flow is negative or worse still no cash in from sale as customer does not pay in 60 days or ever.

Some businesses set both sales and gross margin targets for their sales people and entrust them with the information to measure their progress. Checks can be put in place to have a level of “discounting” or “rebates” that the sales person is able to offer without going back to the business owner/manager for every sale.

Clear guidelines are given re what terms can be offered and credit checks are made on new customers. So here are the basics that are essential to ensure that the sale made is not toxic to your profit or cash flow.

1. Know your cost of your products/services your are selling and set a profit margin or gross margin for each product/service

2. Set sales prices (many people call this the List price) based on the gross margin you want to achieve

3. Set and agree with each sales person what reduction in price they can offer without getting your OK and under what conditions.

4. Have clearly stated credit terms for all types of customers

5. Do credit checks on customers before offering credit or extending credit terms

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