Corporate profits: what counts for more, percentages or absolute figures?

  • Posted by Gerhard Pramhas
  • On 30. August 2018

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The scenario is nothing new: you are an SME, and you receive an invitation from a large corporation to be a supplier for a new generation of products. The potential new client has observed you on the market, and very likely knows your global company data from the balance sheets you have published. Perhaps you have already submitted an offer in the past. This knowledge, combined with analysis software and/or analysis experts, good market knowledge and the dangling of the carrot of “high turnover” puts the major player in an interesting position: he is aware of your cost situation in quite specific detail, but also knows a good deal about your profit situation.

The strategy is simple

It’s easy to see through the large corporation’s approach: using high revenue projections, he will promise you the moon. He will offer free consulting to “help” you understand your own cost situation. Potentially, he may even also offer you a programme that promises to optimise your profits. But at the end of the day, you have to disclose the calculation for your delivery.
What does this mean? Simply put, your new major client will tell you how much profit you may earn as part of the delivery. From experience, this surcharge will be in the region of three and five percent. Your client will estimate a significantly greater profit for himself.

In the long term, this strategy of the major player does not work for you. With these low profit mark-ups, you will not be able to sustainably finance your innovations, nor will you be able to finance any production failures, and you will not be in a position to pursue sustainable acquisition alongside your new major client so as to at least utilise the benefits of cheap raw material purchasing to your advantage in other ways. Sooner or later, you will fall by the wayside and your major client will move on.

A further reason for which this strategy will not work for your SME: superficially, the open calculation has the advantage that you have a good argument for demonstrable price increases of your suppliers, such as steel, to give an example. And you will usually be successful in pushing through these price increases with your clients, since the international commodity market will help you in your argumentation. However, when it comes to the price increases of your small-scale local suppliers, which your client cannot track using stock market data, you will be stuck.

The accounting needs to be right

To come back to my original question: what counts for more, percentages or absolute figures? For a sales volume of EUR 10,000,000.00, three percent profit looks pretty good at first glance. In absolute figures, that’s EUR 300,000.00. However, what expenses will you have to reckon with? Global deliveries, global warranty, several years of the obligation to provide spare parts after production has ceased, the acquisition of new customers, further development, round-the-clock support, and so on… Can you finance all of this with that three percent? I think not.

In my point of view, the following calculation works out much better for you: your sales are EUR 2,000,000.00, while profits amount to EUR 300,000.00 (equivalent to 15 percent). Your client is a company that fits your size category well, and you meet each other at eye level. Your product is innovative, and you implement functionalities that your client does not expect, but that pleasantly surprises him.

Just wishful thinking? Of course, I am aware that this principle is easier said than done. But there’s a magic word that will help you put your plan into action: yes, you guessed right – it’s innovation!

Have you too received an inquiry from a major client and are not sure how to deal with it? Or would you like to discuss an innovation idea in more detail? I’d be happy to start a dialogue with you. Simply use my contact form or write to me at gerhard@pramhas.eu.

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