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The Boss of You

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Revenues vs. Profits

September 22nd, 2007 by Lauren · 1 Comment

The other night, I was out for dinner with a friend who has run two companies, and he asked me how Raised Eyebrow was doing. I told him we were busy and considering hiring more staff to help with the workload. (Sidebar: Said workload, along with some personal stuff I won’t go into here, is why things have been so quiet around here of late.) We talked a little more about staffing and then he said, “Do you realize that when you get to a staff of six, you’ll be a million-dollar company?”

I shrugged in response. Yes, a million dollars in revenue sounds impressive, but gross revenues have never been one of my measures of success. If you’re wondering why not, the answer’s simple: because they have no relationship to profit. And profit is far more important to a business’s health than gross revenues. However, you almost never hear entrepreneurs brag about their profits, whereas they frequently drop their gross revenues into conversation as though they are somehow inherently meaningful. It’s a huge pet peeve of mine, because you can have a $10 million company and still be losing money — so why the heck am I supposed to be impressed by that dollar figure?

I was delighted to discover that I’m not the only one annoyed by business owners who focus on gross rather than net. Enter Clint Greenleaf, CPA.

Greenleaf wrote a pithy little article at titled, Revenue: The Mighty Measuring Tool for Entrepreneurs in which he outlines his favourite ways to measure a company’s financial health. And he opens with a warning to those who like to talk in gross:

“How big is your company?” is an often-heard greeting/challenge in entrepreneurial circles. The entrepreneur in me wants to share and see how others stack up. The CPA in me laughs — and rightfully so.

Revenue is a HORRIBLE metric to use to judge your financial health. Unfortunately, it’s probably the most common tool and one of the few that business owners share freely. But it tells you so little about a company. If you sell low margin product, you need huge revenue numbers just to make a reasonable profit. On the flip side, high margin products need relatively low revenue numbers to make a fair profit. Remember that you can have solid revenue numbers and still lose a ton of money – it’s hard to keep that kind of company in business for long.

Amen, brother. You’re preaching to the choir, over here, but it’s good to hear I’m not alone.

Tags: Business Advice

1 response so far ↓

  • 1 Clint Greenleaf // Apr 4, 2008 at 11:34 am

    Hello and thanks for the kind words. There are a number of us who understand profits – thank God! Good luck on the new book!