The uncomfortable truth

Revenue does not equal growth. It does not matter how much revenue you make if your processes are inefficient or have revenue leakages where your staff steal from you, growth will not come.

You have probably seen businesses where you enter and people are so busy, it is a beehive of activity with many customers. However, the company is struggling. Many times, you find the company is reporting huge sales numbers.

If the cost of sales and operations are big, it is not easy to make profits which you need to succeed. The money that remains after costs of sales, operating expenses like staff salaries and rent and paying of taxes is what we call profits.

It is retained profits that make a difference between a winning company and a losing one. Granted, at the start, any business is likely to make loses. But keep in mind the objective of any investor is profit – not mere revenue.

Are you profitable?

Many companies are so worried about numbers that they miss a big picture – profitability.

If you want to grow, focus on profits not merely on revenue.

If you make the US $10m and spend the US $10m, do you win? Of course, not?

If your revenue is the US $100m, and expenditure is the US $120m, do you grow? You don’t.

What is your cost of operations? What is your target profit? Businesses grow when they register a positive jaw – the rate of growth of revenue is higher than the rate of growth of costs, such that revenue is higher than costs.

Take the example of a restaurant.

If the total costs of buying fresh food to make 10 plates of meals from the market are the US $100.

And the total cost of preparing those 10 plates of food is the US $50.

And the total costs of operations, including apportioned fixed costs per plate, is the US $1, giving US $10 for 10 plates.

And if each plate sales at US $20, you will have total revenue at the US $20 x 10 = the US $200.

In computing profits, we say revenue – total costs of providing the meal = US $200 – US $160 (100+50+10) =   US $40.

In this case, the restaurant makes money. It has a clear target of making and selling 10 plates of food, to generate a profit of US $40. With good management, the restaurant has room for growth.

Now compare the above with another restaurant making daily sales of US $1000, against total costs of US $1,200. Much as the revenue appears big at US $1000, it is declining.

Making a daily loss of US $200 is a big ditch indeed. Many hotel owners are blind to the loss since they get from their own farms or on credit, owners working in the business do not earn salaries.

How are you monitoring your business for growth?

To this end, visit https://exec.summitcl.com/ and enrol on our finance for non-finance managers training. You will learn about record keeping, financial analysis and business acumen.

Revenue does not equal growth.

Only when you make profits and invest in expansion or procurement of new assets and or innovative services and solutions, it is when you grow.

Copyright Mustapha B Mugisa, 2020. All rights reserved.

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