We’ve all been to a social event with other entrepreneurs when the “size of your business” conversation starts. In most cases, we tend to equate Revenue with size. We also often equate success with Revenue. As we see the inner workings of hundreds of businesses each year, we often return to the saying – “revenue is vanity; profit is sanity.” Let’s dig deeper and discuss why.
Back to the conversation. “How large is your business?” “Well, we usually run around $20 million,” replied the entrepreneur. Upon hearing that, you became nervous and a little embarrassed. “How about you?” You reply, “Sounds like you guys are on fire; we only run around $5 million.”
If you had the books, you would see that the 20 million revenue business is a wholesaler who only generates a 10% margin on their sales. In reality, they are indeed a 2 million (that is their gross margin) dollar business. That is a big difference! So, where is the lesson?
Revenue is vanity! Sure, you must have it to generate profit; however, focus on what margin (profit) you are making on your Revenue! Do you have products, services, or customers that are below target? Given the shortage (now and in the future) of labor resources, your focus should be on selling and servicing the products, services, etc., that generate the highest margin. You may not win the revenue conversation, but you will win the profit title!
Comments