Not All Revenue is Created Equal
Manyowners envision “more revenue” as the key to a higher selling price. But, is that really true? Is it really more revenue that the owner needs, or just better, more profitable revenue?
It can be an enlightening experience to understand what tasks create value in your company and which ones simply keep you busy. It can also be devastating if you’ve spent years focused on the wrong activities.
There’s a tremendous difference between bringing money into your company and putting money in your pocket (adding value). You’re not in business to be a conduit for money. You want to either keep it for yourself, use it to pay down debt, or use it to finance your company’s growth. If the revenue is merely passing through your fingers, what’s the point?
It’s time to take a closer look at your business; not as a whole, but by each individual product or service line. Calculate revenues for each product or service, then take a look at the costs that you incur in order to generate those revenues. Subtract the cost to produce that product / service from the revenues as well your cost to deliver it to the customer. Are all your product / service lines profitable? There’s more…
Don’t forget to allocate your overhead!! There are certain functions in your business that you can’t reasonably allocate to just one product or service, such as accounting, rent, and utilities. For these expenses allocate them to your product or service lines based on the same percentage split as your revenue.
For example, if service A accounts for 30% of your company’s revenue, assign 30% of your rent, 30% of your utilities, and 30% of your accounting expense as a cost needed to generate this revenue. Now, are all your product / service lines still profitable?
If not, why are you wasting your time chasing this revenue? Wouldn’t it be smarter to reallocate your time and the resources of your company to a product / service line that is actually making you money?
Hopefully you don’t have a product or service line that is costing you money. Maybe instead, you learned that the profit margins for your different products / services are very different? If you did, would it make more sense to shift your resources away from the products and services that are less profitable and over to the ones that are more profitable?
Think about it, if Product A puts $.10 in your pocket (after expenses) for every dollar in sales you generate and Product B puts $.25 in your pocket (after expenses) for every dollar in revenue you generate, wouldn’t you rather focus the efforts of your company on Product B? $.15 may not seem like a lot, but consider this: if you’re doing $500,000 in annual revenue, making $.15 on every dollar means you’re putting $50,000 in your pocket every year. If you shift your focus over to Product B which puts $.25 in your pocket, you’d now be putting $125,000 in your pocket every year.
You don’t have to bring in more revenue to add value to your company. You just have to work smarter.