You may want to drop unprofitable accounts

score Question:After five years in business, my earnings are not where I had projected. I'm not earning enough profit and I'm not usre why. I put a markup on all products and services.

Answer: There's an old rule of business: 80 percent of your profits will come from 20 percent of your customers.

If you check your sales figures, you'll probably find that this rule is not quite right, but the basic idea is correct: a small percentage of your customers are accounting for a large percetage of your sales. So if you want to increase your profits, you need to be sure that you keep these big buyers happy.

Even more important, however, you need to do a breakdown and find out how much profit you are making from each of your accounts. Why? Because in today's economy there are many small businesses that are losing money on some of their accounts.

A client recently broke down her sales by dividing the accounts into five groups based on profit. She had almost 2,500 accounts that did business with her on a regular basis. The best 500 provided a profit margin of more htan 30 percent; the next 500 provided less and so on. Surprisingly, the last 500 cost her money. She would have been better off not doing business with these people because they purchased very little, much of it low-margin merchandise, and the cost of servicing these accounts was almost as much as that of the best 500.

The lesson associated with this analysis is clear. If you want to make more money, you must be selective in choosing your customers. If you want to do business with everyone, you are going to gind yourself losing money on some accounts.

Of course, there is always the chance that these losing accounts eventually will grow to be profitable customers. On the other hand, in most cases they continue to be losers. These customers are demanding and the minute they can get a better deal elsewhere, they leave. The chances of making money from them is limited.

So what do you do? Face the fact that if you want to make a profit, you are better off not doing business with marginal accounts, unless you can see that they are going to grow into profitable ones. Set a deadline or specific sales level. For example, if a customer account does not produce a profit within 90 days of buy $1,000 a month within three months, you will drop the account.

You may want to argue with this logic. Perhaps it will take six months before this account becomes profitable. Maybe - but then again, the account may never be profitable.

One way of getting some insights into this is to make an analysis of your marginal accounts: How long have you had each of these as customers? How muchmoney do you make from each? How many of them have become profitable? How many have not?

This type of analysis often reveals some very disturbing news. You may not want to give up on marginal accounts, but they never turn the corner.

The lesson is clear: If you want to be profitable, you have to be willing to turn down some business. Simply put, if you can learn to say no, you can increase your profits.

Bill Bryan is a counselor with the Service Corps of Retired Executives. SCORE offers counseling, workshops and seminars on small business operations. You can reach Bryan through SCORE, 515 N Court St. 815-962-0122, for information and appointments.


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