One of my favorite quotations is “Revenue is vanity, profit is sanity”.
Nothing tells you more about how to run a business than this simple quote.
It doesn’t matter how much money is passing through your company if the profit is not there. It’s profit that pays the wages, pays for further investments and keeps the company above water.
One company I worked for, a major global player forgot this, and in their drive to become number one in the market they bought revenue.
But it was bad business, with every dollar that revenue increased so did the losses, the business that was bought was non profitable, it was business that our competitors were happy to see us win.
Eventually the company forecast over a $1billion loss in the US, the CEO was replaced and the new CEO began to get rid of the non profitable business.
He understand that profit is sanity and not all revenue is worth having. He slashed all of the bad business, cut costs, which also resulted in redundancies, but if the business is not profitable this is unavoidable. Within 2 years the new CEO had turned the business around, the revenue was well below what it was but the company was profitable.
It was clear to me that the previous CEO had not grasped this simple saying. We had two IT projects on that needed to be delivered, one focused on reporting pricing of products, and the other focussed on the costing of products, and he prioritized the pricing project.
How can you determine product pricing if you don’t know the costs, that a sure fire way to put yourself at risk.
If we had focused on the costing project, at least we would have known the cost of our products, then we could have at least use added 10% to try and achieve a 10% profit.
It always amazes me how people can just focus on revenue. I appreciate in the good times that this might work, but in times of economic crisis, like the one we have just experienced, it’s a sure fire way to send your company to the wall.
Remember, business is about making profit!