Most entrepreneurs find themselves extremely reluctant to turn away an order for any reason. The notion of telling a client or customer that their business or order is too small is frightening to even the most seasoned entrepreneur. However, if you don’t want to leave money on the table, and instead desire to make more profit, setting and enforcing a minimum order policy is absolutely necessary!
This post is intended to help entrepreneurs recognize, first and foremost the source of the PROFIT in their business. Most entrepreneurs are shocked to learn that most of their effort and headaches are derived from servicing the least profitable segment of their business. Sad but true.
Before we attempt to determine the correct, or optimal, minimum order amount, a business owner needs to first determine where the profit is coming from.
There is simple and enlightening way to do this, especially if your financial records are kept on QuickBooks®.
Start by looking at where your business, in terms of gross revenues, came from in the last twelve months. Start at the top and list your Customer or Client that produced the greatest gross revenue and then follow that up with the next, and then the next, etc. until you have exhausted your entire list.
If you use QuickBooks®, it is easy to get this information. Go to:
- SALES BY CUSTOMER;
- Select the period to measure—One year is a good timeframe for this exercise. Place the twelve month period in the “To” and “From”;
- Select SORT BY TOTAL;
- Select Z TO A (the default is A To Z).
This report will provide a summary of a company’s gross sales dollars by Customer or Client from the Greatest to the Least. Take a look and you may see that many of your headaches are related to servicing the names on the bottom of this list.
This is the first, very important step that an entrepreneur must take to understand their company’s profitability—and the possible notion that they may be leaving money on the table as a result of their company’s minimum order policy (or lack thereof!).
Our next post in this series will address the next steps in this analysis by introducing the 80/20 Rule also known as the Pareto’s Principle (or Law).
Find Holly Magister on Google+
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
Latest posts by Holly Magister, CPA, CFP
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- How to Prepare for Due Diligence When Selling a Business - February 12, 2019