As profitability and growth advisors, we remind you, that it is not what you make, but what you keep. Too often, business owners focus on sales without regard to whether it is the right customer or whether it is a profitable service or product line. Here is an article by Ran One that gives a perspective on focusing on profit versus revenue.
Hot Take: Focus on Profit Instead of Revenue
Feeling the itch and ready to tackle growth in 2020? That’s great! But take a pause and really pay attention to your business plan—are you focusing on profit or revenue?
“Revenue is the top line of a financial statement. It’s a straightforward calculation. It represents the number of products sold multiplied by the price. I like to think of a profit calculation as a way of thinking if your idea is worth doing. If there is going to be value to your idea. Profit is the bottom line of every financial statement…So, to figure out the profit of an idea, you have to figure out every single expense."
—Entrepreneurs Handbook.com
It’s a very common mistake made by small business owners when they are considering growth to focus on the wrong one, at the wrong time.
Focusing on profit means focusing on every single detail of every single cost that will be involved with actually getting this product/service off the ground- the expenses factored into the calculation from the very beginning.
When you do this, you are setting yourself up for experiencing higher revenue numbers, with the stepping-stones to climb to that number, rather than harbouring the unrealistic expectation of overnight million-dollar ideas.
Another slippery slope is getting too focused on valuations and investors. Once again, these things aren’t going to matter if your product has no value in the end and the business/ service/product never gets off the ground.
To focus on profit growth, consider:
1. The state of your industry, in relation to the overall economy
2. How big is the market and how fast is the hole being filled?
3. Where are your start-up funds and other capital currently coming from?
4. Who else, if any, is also going for this market opportunity?
5. How are you protected against the competition (patents, TM’s, unique business indicators)?
6. Does your competitive advantage have a shelf life?
Profits will allow more selectivity when it comes to who invests with you, it will create flexibility in the when’s/where’s and how you consider investments and valuations. With profits, you have options.
Source: Ran One, 2020