Articles Tagged ‘Profit vs. revenue’

Are You A Slave To Revenue?

Wednesday, April 30th, 2014

Joe has a successful business, revenue continues to grow and he is hiring more people. But the truth is Joe is highly frustrated; he is doing more work but having to chase dollars to keep the operation funded. So he focuses more effort on generating more revenue in hopes that this cash cycle (and the frustration) will lessen. Will the frustration go away with more revenue? How would you advise Joe?

We have been conditioned by our society and encouraged by bragging rights that revenue growth is the most important thing in owning a business. But revenue growth by itself is an illusion and won’t get you the results you truly want. Profit is the key ingredient in business success but it is hard to find out why that is true.

Have you spoken recently with someone who has openly talked about their business profitability? Probably not another business owner or friend; you might with your accountant but what kind of reaction do you get there? Tax consequences, and we surely don’t want that! Every way we turn, there is little emphasis on being consistently profitable in our business. Profit is nearly a six letter obscenity and synonymous with greed, if you believe what you hear.

Here are some beliefs that will help you understand why profit is more powerful than revenue and so important to a business:

●Profit increases cash in the business – profitable businesses will grow their cash position if they are not using that money to reduce debt. So if you want to have more working capital – cash available for about anything – profit will create it.
●Profit increases equity in the business – profitability (flowing into retained earnings) is the primary ingredient that increases equity in a business. The amount of equity directly impacts leverage and this impacts how fast revenue can grow.
●Profits provide more money for the shareholders – When a company is profitable, dividends can be paid to those who have invested in the business.
●Profit increases the ability of the company to borrow. Debt to worth is one of the key elements lenders look at to determine if they will grant more debt. If your company has three dollars in debt for every dollar in equity, borrowing more money is probably not a viable option. Profit is the key to leverage control.
●Profit funds growth – growing revenue creates growth in accounts receivable, inventory and other assets. If one side of the balance sheet grows, the other side has to keep up and that only happens with increases in liabilities and equity. Businesses that are not profitable will have limits on revenue growth.
●Profit pays down debt. Profitable companies will pay down debt much faster than those businesses that are just getting by. Profit turns into cash, which can be used to reduce or pay off debt.
●Profit provides opportunities for employees. It is very difficult to pay good wages and bonuses when there isn’t enough money to keep the creditors and lenders happy. Profitable companies continue to hire great people because they can afford to and that perpetuates itself.
●Profit provides stability – business owners are much more productive when focused on money-making opportunities and not chasing the next dollar to pay a vendor or make payroll. Profit affords a cash cushion that provides that stability.
●Profit provides peace of mind – who has the most piece of mind, the business owner with $100,000 in the bank and no borrowings, or the one with no money in the bank and $100,000 in borrowings?

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
phone: 765-644-8887

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