I sit in on a lot of CFO/leadership meetings for many companies, big and small, and I notice how fast those who are obsessively concerned with the top line revenue lose sight of what matters most — profit! To be successful in business you need a healthy combination of growth and profit.
I am fortunate to have the opportunity to learn from some of the best mentors a person could ask for — shout out to Rick Sapio for changing my mindset with many hours of mentoring and his Business Finishing School. I get to learn from some of the smartest business leaders but I also get to consult and advise them too. There is one simple formula that should be on every business owner’s mind:
Revenue – Expenses = Profit
So, what happens when you start chasing a top line number and forget about a bottom line number?
Before I describe each, it’s important to note that not everything here may be true for a startup whose goal is to scale crazy fast with a large initial investment. Additionally, not every industry and every business can expect the same margin. There isn’t some magic formula that says because you sell this or that you’re guaranteed an xyz result.
When profits decrease and you run “in the red”, so do bank accounts. I meet a lot of people who can’t understand how they “sold double this month” and still don’t have any cash. In this case, most probably they discounted their product so much that they lost the margin, or they sold much but haven’t collected the AR to pay for the expenses to produce/sell or cover overhead.
Are you growing for the sake of size in both revenue and overhead, or are you growing to make more money = profit? Generating huge top lines feel far more sexy than growing the bottom line. Ask yourself how many dollars each sale is generating in gross profit margin. Will there be enough to cover your fixed costs or have your margins become so thin that one big mistake could cost you everything? Now more than ever, it’s important to grow at the right rate of speed for the right reasons.
We see a lot of CEOs who are sales driven. Their main focus centers around finding and closing the next big deal. They need to travel, buy things, take people out, wine and dine. Everyone else in the office needs stuff, too. Sally and Charlie subscribe to two new softwares that aren’t really necessary, Maggie gets a new computer, and Bill bought a new piece of machinery all without you even knowing or realizing what it totaled up to. One of the best pieces of advice I can give is to watch every single expense hitting every single line like you’re on a budget even if you aren’t. Your profits will absolutely be maximized. How long has it been since you did a thorough analysis of all of your expenses?
Questions? Email me firstname.lastname@example.org
Thanks for reading!
Ashley Altum, CPA