In the business world, there is a common belief that revenue growth is the most important factor in determining a company’s success. However, this is not always the case. In fact, there are many other factors that can contribute to a company’s profitability, even if its revenue is not growing.
Here are some of the reasons why revenue growth isn’t the most important key to business profitability:
- Revenue growth can be misleading. Just because a company’s revenue is growing doesn’t mean that it is actually becoming more profitable. It is possible for a company to grow its revenue while actually losing money due to unmanaged spending.
- There are other factors that contribute to profitability. Profitability is not just determined by revenue growth. Other factors that can contribute to profitability include cost control, pricing, and product mix. A company can be profitable even if its revenue is not growing if it is able to control its costs and price its products or service effectively.
- Profitability is important for long-term success. While revenue growth can be important in the short term, it is not as important as profitability for long-term success. A company that is profitable can reinvest its profits in new products, improving operations, research and development, or marketing, which can help it to grow its revenue in the long term.
So, while revenue growth is important, it is not the most important factor in determining a company’s profitability – Cost Control is. It’s more difficult to “grow” your way to increased profit than it is to effectively control costs. Why? In simple terms, $1.00 in revenue growth does not, of course, equate to $1.00 in profit. In contract, $1.00 in cost or expense savings is exactly $1.00 of increased profit. The graph below illustrates this more clearly. It shows the amount of revenue needed to create a profit of $1,000 by percent profit. On the first line, it demonstrates that if our profit margin or net profit is 1%, it takes $100,000 in revenue to generate $1,000 in profit right? (1% of $100,000 = $1,000). If you increase your profit margin by three points, in this example, to 4%, it deceases the amount of revenue needed to make that same profit from $100,000 to just $25,000 – a reduction of ¾! This clearly illustrates why efforts to control cost not only pay off in higher profit short term but it has a “multiplier” effect on profit since, as the business grows you make more, as a percentage, on future revenue.
Companies that focus on cost control, even if their revenue is not growing, will be more likely to be successful in the long run.
Here are some tips for improving profitability without sacrificing revenue growth:
- Focus on cost control. One of the easiest ways to improve profitability is to control costs. This process begins by ensuring that your Chart of Accounts (COA) accurately reflects the line items that are important to track for your business. Without this, expenses can become “hidden” and difficult to track, resulting in lost profit. Once your COA is set up properly the process of effective cost control can begin. Additional ways to control costs include; negotiating better deals with suppliers, reducing waste, and streamlining operations.
- Price your products or service effectively. The price of your offering is a major factor in determining your profitability. Make sure that you are pricing your offering right for the market. A study on demand elasticity may be helpful to ensure your product or service is priced appropriately in the market to maximize profit.
- Focus on your product or service mix. The mix of products that you sell can also have a big impact on your profitability. Do you know which products in your line deliver the highest profit? Have you ranked them by ROI? For service, have you considered supplementing your bid work with T&M to cover fixed costs while you wait for projects to finish?
- Invest in your business. Investing in your business can help you to grow your revenue and improve your profitability. This could include investing in new products, research and development, or marketing.
By following these tips, you can improve your profitability without sacrificing revenue growth which will help you to build a strong foundation for your business’s long-term success.
Ready to start the journey to improved profitability? At Ionji®, we have decades of experience and a track record of proven success in helping companies put in effective cost controls that improve profitability. Please click this link to contact us today or e-mail us to learn more at firstname.lastname@example.org