What is profit?

Might seem a strange question on a “sales training” blog but if that is the Key Performance Indicator we are working towards we had better understand it.

In simplest terms profit is the excess income over expenditure. Net profit means after all expenditure of all kinds. So that would suggest profit is cash in the bank. However profit is very unlikely to be tied up in cash in the bank. It could be out there in the business doing good as stock, machinery, vehicles. So what happens therefore if we discount our product or service?  Will that have an effect on stock levels? Not necessarily but an apparent small discount can spell disaster. A deal of £1800 instead of £2000 annual contract could mean your salesperson has condemned your company to work for nothing. If the profit margin is only 8% (quite normal in many industries) we are now paying our client 2% to keep our company busy and not able to service a proper client. So often our salespeople are targeted on the wrong thing. If we target revenue generated it can still mean thumping losses. A whole series of these unpalatable contracts would mean the salesperson has met his revenue target and our organisation is left to do the impossible with no money for the owners.

If we target profit that can still mean no cash in the bank to pay the bills. A profitable contract might not pay much early on in the contract leaving us to finance the client for a while. Or payments are made late and our company’s health is at stake. The cumulative effect is sometimes the salesperson being paid handsome commission on a contract that has not even covered the commission to date and leaves the organisation wide open to financial failure.

So if we cannot safely make targets related neither to revenue nor profit, what can we set targets on? Profit margin? But that would mean selling the cheapest product for the most money possible, a route to certain reputation failure and subsequent falling revenues and bankruptcy.

How should we target our people, then? All of these measurements are important; revenue, profit margin, profit, payment terms. Our salespeople have got to be aware of the effect both positive and negative of their negotiations. After all your employed salespeople are still running their own business, just with one client- you. So it would make sense for them to understand their own business and how it relates to yours.