“Revenue is vanity, profit is sanity,” is one of my favourite quotes.
This short remark says more about how to run a business than anything else.
It doesn’t matter how much money is flowing through your business if you aren’t making a profit. Profit is what pays the bills, invests in the future, and keeps the company afloat.
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 understood that profit is sanity and not all revenue is worth having. He slashed all of the bad business, and 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 that needed to be delivered, one focused on reporting the pricing of products, and the other focused 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 is 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 used 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, it’s a sure-fire way to send your company to the wall.
Remember, business is about making a profit!
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