One of the snares that catches some entrepreneurs is overemphasizing revenue. Yes, revenue is important. Without dollars coming in, there can’t be anything coming out. Sometimes, however, our definition of growth for our business values gross more than net.
My team and I have worked with entrepreneurs of all shapes and sizes. There have been those enterprises that grew to $1 million plus in annual gross, thereafter kicking out several hundred thousand a year to a founder. There were also smaller concerns that despite less impressive sales, were able to return an even higher percentage of dollars to the owner.
But we have also seen businesses that gross $1 million per year, and pay out $90,000 of that to the top dog. Then there are the boutique firms that pull in $100 grand and manage to net $90,000.
Of the latter two examples, which entrepreneur do you think might have less headaches and more satisfaction from his or her business?
Understandably, all businesses are not the same. For some high-volume companies, a 10% return might be considered outstanding. For others, it’s not unheard of to achieve 50%, 60%, or higher net after expenses (and before taxes). And certainly, it’s the dream of most entrepreneurs to have $1 million in sales, and watch that top line number continued to skyrocket from there.
Yes, revenues are good. But profit is better.
Sometimes, our egos get in the way, and we are concerned with only bringing in business. Often, this causes us to bring in the wrong kind of business, that which may not return the same margin as other efforts might. Moreover, whereas we were once tightfisted with a dollar, as a business grows and matures, we all tend to get a little more lax watching the expense ledger, don’t we? It’s pretty easy to let various line items, big and small, get surreptitiously tacked on the monthly nut.
How does our overhead grow? One mistake that small business owners make when deciding whether to increase an expense, or add a new cost onto the business operations, is forgetting margins. Essentially, you are failing to pay yourself. For example, a service-preneur with a 50% margin needs to increase fee receipts by double what he or she tacks onto expenses simply to maintain the same spread.
So the moral of our eighth mutable law is to always remain vigilant about expenses. Recognize how margins work, and the amount of revenue that’s necessary to afford another expense. Don’t fall victim to stroking your own ego by pulling in bigger and bigger sales numbers if these don’t also proportionately move the bottom line. If your company’s not rewarding you adequately for those revenues, you are simply working harder, not smarter. Remember that many a company that looks successful to the outside world, because it’s transacting what appears to be a lot of business, often collapses because the costs of obtaining that business make the concern a losing proposition.