When people talk about growing and scaling their business, they often talk about growing revenue.
“How do I efficiently scale sales? What’s my month-on-month revenue growth compared to benchmarks? What’s my Compound Annual Growth Rate?”
Indeed, the questions and the conversation almost always comes back to growing revenue.
It’s easy to see why, with the media often favouring companies that can boast quadrillion-digit revenue growth. This is especially true if you’re in the tech start-up industry.
But the thing is, revenue shouldn’t be perceived as the sole metric of “success”.
Let’s take a look at what you should really be looking at instead.
In this article:
What matters more than revenue
With all the headlines and noise, it’s easy to be swept up into a world where nothing but revenue growth matters.
Yes, revenue is important, but waiting patiently in the shadows is one of the most paramount aspects to your business’s success – your profit margin.
We’re talking about your company’s ability to generate profit. It’s not just about revenue – it’s about the amount by which that revenue exceeds your costs.
The humble profit margin doesn’t often get a mention. Seldom do we hear about companies growing their profitability. After all, profit isn’t sexy; revenue is.
But revenue is only part of the equation, and can be misleading by itself. What if, to generate that revenue, you had to spend an even greater amount? That’s why we should be talking more about margins, and less about revenue in its own right.
Gross profit is a critical metric that every business, irrespective of size and industry, should pay attention to. It’s more important than measuring sales because it shows the quality of your sales.
Having a high gross profit margin can give your business a competitive advantage because better gross profit margins improve the efficiency of the business.
Watch: How to calculate your gross profit margin
Why sales don’t fix everything
Sales can fix a lot of problems. When you have sales, you have money to be invested back into your team, your tech and your marketing. But you shouldn’t believe the old cliche that sales fix everything.
Gross profit dollars do.
A dollar is a dollar is a dollar, right? Is $1 of sales the same in comparison to another? Not quite.
You see, not all revenue dollars are created equal – but all gross profit dollars are.
Let’s look at the profit and loss of a business:
Now, looking purely at the 2020 financial year, you would say that the business has had considerable growth compared to the previous year, as it did an extra $1,300,000 of sales.
However, by looking at their respective gross profit, the company actually generated less money than 2019.
Why? Because it didn’t produce and sell its products as efficiently as the previous financial year – or perhaps it was selling products at very low margins. Although overall sales grew, gross profit actually declined.
If your goal is to increase profit and you haven’t figured out how to produce your product efficiently, simply adding more sales will not result in more profit. In fact, it can have an inverse effect and create a fat, profit-eating monster.
Don’t get us wrong, revenue growth is important. But over the long term, what’s a company worth if it only has revenue and not profit?
Just take a look at tech companies like Uber and Snapchat. They are two highly valued companies – and they are still yet to post a profit. Let’s see their market cap a decade from now.
We should be talking more about profit margins, and less about revenue – and until we do, we won’t have the full picture.