Revenue Growth: Are you leaving money on the table?
Today I want to talk with you about revenue growth and the difference between revenues/sales and gross profit. I also want to discuss why it’s more important, in my opinion, to manage your gross profit than your sales.
More often, than not, with business owners that I speak to about growing their business, the first thing they want to talk to me about is that they want to grow their business and they want to grow their top-line revenue.
It’s almost synonymous that I want to grow my business means I want revenue growth, I want more sales. From my point of view though as a financial strategist and CFO. It’s really more important to grow your gross profit.
Why do I say that? Well, let’s consider a business that has $200,000 a year in ongoing operating expenses. Those are the expenses that you would pay even if you didn’t sell any product or service at all. Because you are in business, you’re going to have a certain amount of expenses that might include your salary or your assistant’s salary, your office rent, your transportation and marketing expenses, etc.
The operating expenses in this particular business are $200,000. Now, let’s say that there are two different businesses that have the same exact operating expenses. One business has total top-line revenues of $1 million dollars. The other business has total top-line revenues of $750,000 dollars.
The business with $1 million dollars in top-line revenues has a gross profit percentage of 35%. The business with $750,000 in top-line revenues has a gross profit of 45% – a 10% difference in gross profit and a $250,000 difference in top-line revenues.
The business with $1 million dollars in revenues at a 35% gross profit or $350,000 dollars subtracting the operating expense this business has a net profit of $150,000 dollars.
Let’s talk about the business with $750,000 in top-line revenue, but has a 45% gross profit margin. That means that for this business the gross profit is $337, 500. Subtracting the $200,000 in operating expenses and you get $137,500 of net profit.
Now $150,000 is, in fact, more than $137,500 but consider – suppose the business that is doing $750,000 increases their revenue to 1 million dollars and they maintain a gross profit margin of 45% or $ 450,000 less than $200,000 of operating expenses. They have a net profit of $250,000 or $100,000 more than the business with a 35% gross profit margin.
So, for the same level of revenue, a change in the amount of gross profit as a percent of revenue yields a significant difference in the amount of net profit.
Hence, you want to make sure that you are managing your gross profit percentage. It is a more important aspect of your revenue than is the actual amount of revenue. If you have revenue of a $1 million and you have a 20% gross profit then you’ve only got $200,000 as gross profit. Deduct your two hundred thousand dollars of operating expenses and you are at zero net profit. Compared to a business that has a larger gross profit margin on the same or even a smaller amount of revenue will yield much better results.
I hope that you will take this to heart and look at what it means in your own business.
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