Ask any small business owner how big their business is and 9 times out of 10, you’ll probably get an answer that includes a revenue figure. While revenue is an important factor when evaluating a business’ size, there is often too much emphasis put on revenue and not enough on profitability.

 

More revenue does not equal more profitability. A 10-million-dollar company may sound like a successful company, but if its profitability is only 100 thousand dollars, it’s only generating 1% in net profit. A 750-thousand-dollar company that makes 100 thousand dollars is producing more than 13% in net profit. A 750-thousand-dollar company is much easier to run than a 10-million-dollar company. There is less compliance, less headaches, and well, less revenue! But, who cares? If you can generate the same amount of profit off 750 thousand dollars that you can generate off 10 million dollars, wouldn’t you rather do that?

 

This is not to say revenue isn’t important. Obviously, every business has some fixed costs that can have a lesser impact as revenue grows. However, before you focus on growing your revenue, make sure you’ve got your margins in order. Are you charging enough? Do you need to find ways to reduce your costs? What is your margin on each product or service sold? Are you selling to the right customers?

 

Once you have a good handle on your profit margin, then go grow your revenue. Apply that 13% net profit to a 10-million-dollar business. Then, you’ll have something to talk about!

 

Written by: Shauna Huntington