I heard a great speaker several years ago at a Vistage meeting. He talked about Gross Revenue as a marker tied to ego, Gross Income as a marker tied to management and Cash Flow as a marker tied to reality. The idea is that Revenue doesn’t mean anything if it doesn’t have profit built in (income). And income and profit don’t mean anything if you can’t get the cash in.
I recently did a blog on cash flow that seemed to resonate because everyone struggles with cash flow and no one survives without it. However, if you spend all your time focused on selling to get your revenue up and collecting to get your cash in, there may be another problem inherent in your process. It suggests that no one is taking the time to ensure there is enough profit from your sales to actually fund your operation.
It’s easier, and frankly more fun, to think about new prospects to sell your vision and offerings to, but you can't lose sight of how you create sustainable profitability if your endeavor is going to be a going concern. Here are some profit-related concepts and ideas--some easier than others--that can simplify the exercise.
Look at your gap between revenue and effort
I’m fortunate in that I love spreadsheets and analysis. Most people do not. My business is also fortunate because we require timesheets from our staff so we can pull data that shows: a) amount of effort/time by account or contract, and b) amount of revenue by account or contract.
One quarterly report can show that a piece of business that took 20% of the firm’s effort only generated 5% of the revenue. The gap between that 20% and 5% is lost profitability. The client that took 5% of our effort and generates 20% of our revenue is profitable and therefore deserves more focus. I don’t want to call it ‘easy money’, rather 'smart money' because the easier it is to work with people, complete the engagement to satisfaction and collect, the more profitable it will be.
Look at your gap between revenue and time to complete
Even if you don’t use timesheets, you may be able to look at time as a measure. If one piece of business takes 5 months to complete for the same amount of revenue that you received for a 1 month engagement, that gap points to profitability. Time is money. If you can do it in a month for $10,000, then you can do it 5 times in 5 months for $50,000. Pull a report that shows an engagement start and end date and review the associated revenue--these kinds of insights are a real eye-opener.
Look at whether your engagements grow and are repeatable
Increasingly we’re a services economy. That means the effort the team puts in to winning a piece of business, learning the account and solving their first challenge is likely fixed. When you onboard an account, go through the process, complete the engagement and have no additional work, it has a significant impact on profit. To start moving the bar on profitability is to leverage those learnings on a second and third engagement. The more context you have and the more quickly you can solve the next problem, the greater your likely profit and success on subsequent engagements. Repeat engagements mean greater profitability because the cost of sales is diminished, the cost of starting has gone down and your likely efficiency from familiarity has gone up. Repeatable business is not only great for forecasting revenue and reducing sales costs, it is also a powerful indicator of recurring success for potential investors and sources of capital. A repeatable model for generating profit is the lynchpin for every successful entrepreneurial venture.
Get a handle on your profitability and take it to the bank
The examples above do not require a CPA, actuary or statistician. What they require is the discipline to pull the data, assess what it is telling you and make informed decisions for driving more of what is working. Start small by reviewing one or two of these reports monthly.
After reviewing them for a quarter or two you will uncover patterns that suggest future business decisions. Those decisions could include resigning an account or spending less time chasing it. It could include doing more of a certain kind of project or service that generates more revenue with ease, repeatedly. It could mean promoting core members of your team that deliver work more profitably and engender loyalty or repeat transactions.
At the end of the day, profitability and good management don’t always get you in the headlines. But smart entrepreneurs aren’t in it for the press. The press and the investors will come if what you’re doing makes profit. As Benjamin Franklin said 'An investment in knowledge pays the best interest.' Check your Gross Revenue ego at the door and get more knowledgeable about how you generate more profit to see more of it.
