This is the third episode of the season, and I was disappointed with the lack of financial information provided. The episode dealt more with the personal drama going on between the owner and employees than with business details. Also, I don't think the business was struggling with cash flow or profits. I believe the business presented an opportunity to Marcus Lemonis. So this episode provided more lessons to a would-be investor than to a business owner.
Nonetheless, there is always something to learn from every situation. I learned a new financial term and there is an important take-away for businesses in the service industry. You can watch the video or read the blog below the video.
- Business started in 2004 by two partners, Dave and Tim, each owning 50%
- Tim died suddenly a year ago with no succession plan in place
- The business sells soups, sandwiches, salads and desserts
- Soup is a high margin product
- The business generated $1.85M in sales, but they didn't say over what period of time
- The business has very low debt, only $85K
- Dave needs to buy out Tim's estate, and that is estimated to be around $100K
- The consolidated margins are around 52%
- There are 5 locations
- The business does not use a POS (point of sale system)
- Dave estimates that soup makes up 60% of his sales, but he doesn't know the mix of his other products that makes up the remaining 40%
- Dave does not know his profit margins, how much it costs to make each soup or even the nutritional information of his soups
- A "consolidated margin" is the total profit margin of ALL your products. It's important to know the profit margin of EACH product and to know your consolidated margin. Marcus Lemonis says The Soup Market's consolidated margin should be 70%.
- A 70% consolidated profit margin seems high when you compare it to what is usually advised for a restaurant. In the restaurant industry, the goal is for food and labor each to cost 30% of revenue for a total of 60%. That leaves a 40% profit margin. However, a self-serve (ordering at the counter) soup kitchen should have a higher margin because the ingredients are less expensive than a full-menu restaurant, and there is little to no front of the house labor.
- Once again, the owner does not know his numbers, and it's shocking that he does not use a POS. Marcus Lemonis says, "What you need with good data is to understand what sells best, what sells terrible, what to add into the rotation, and what to take away. We might as well go back to an old five and dime store with a metal register with those big keys, because all he’s doing is taking money and putting it into a register.”
- I've never heard the term "consolidated profit margin," but I've been analyzing it and talking about it with my clients for years. I've just never used that term. To calculate the consolidated profit margin:
Gross Revenue $20,000
Less COGS $9,600
Equals Gross Profit $10,400
Then divide Gross Profit by Gross Revenue to get the Consolidated Profit Margin
$10,400 / $20,000 = 52%
When someone asks you what your profit margin is, you may want to ask them to clarify the question. You have different profit margins for different products, and you have one consolidated gross profit margin (the example above) for everything.
- The lesson that keeps repeating in every episode of The Profit is that the owners don't know their numbers. But in this case, Dave did not know the nutritional information about the product he was selling. When Marcus Lemonis suggested that potential customers would like to know this information, Dave said he's not selling to those customers. There are three lessons here:
- You always want to know what's in your product! Even if you choose to not disclose the information to the customer, you should know everything about your product - where it's made, what is in it and if it's food, the nutritional content.
- If you would not be comfortable disclosing all the information about your product to the customer, then you should seriously reconsider selling the product. If you can't get excited about your product and stand behind it 100%, you and your employees will have a hard time selling it.
- Dave's comment that his product is not for people who want to know what's in their food is crazy. This cuts out millions of dollars of sales and shows he is not in tune with what's going on in today's food market. More people are demanding to know what's in their food from ingredients to nutritional information to where it's sourced. Don't be out of touch with the market you are serving. If you don't like where the market it going, get it out of it and sell something else. But don't cripple your business by selling to a market whose demands and wants are something you don't agree with or refuse to meet.
- We all know that a business selling retail products and services in a storefront must have a POS. Not only will the POS give you financial data, it tracks actual cash received and helps prevent employee embezzlement. Service providers who don't have storefronts (accountants, attorneys, cleaning services, etc.), should also track sales of their different services in a similar system. For example, it would be helpful information if a commercial janitorial service could know how much of its sales comes from regular commercial accounts, construction clean up, move ins/move outs, etc. Sometimes service companies don't track profit margins for different types of services because there are no products or inventory to track. However, knowing your sales and costs for each of your core services will provide invaluable information. Many businesses are engaged in selling products and services that are not profitable or losing money because they don't track this information.
Please note: The assumptions and opinions here are for teaching purposes only. I in no way mean to insult or throw shadow on anyone's character or business acumen. I understand that very limited facts are presented in the TV show, and I'm aware that there's always more to the story.