Why Revenue Is a Terrible Measure of Business Success
One of the most common mistakes I see business owners make is using revenue as the primary measure of success.
Revenue is easy to track. It’s easy to compare. And, let’s be honest, it is fun to talk about.
But revenue doesn’t tell you how much money you’re actually making.
A company can generate millions of dollars in revenue and still struggle financially. At the same time, another company with less revenue may be significantly more profitable. That is because revenue measures activity and profit measurers performance. There is a big difference between the two.
A Simple Example
Let’s look at a simplified example.
Assume your company completes a $5,000 chimney repair.
Example Job #1
|
Item |
Amount |
|
Revenue |
$5,000 |
|
Labor & Materials |
($2,500) |
|
Gross Profit |
$2,500 |
At this point, the job has generated $2,500 in gross profit.
However, every business has expenses that aren’t directly tied to a specific job, including:
· Office staff
· Insurance
· Phones
· Software
· Marketing
· Vehicle payments
· Rent and utilities
For this example, let’s assume overhead allocated to this job is $1,500.
|
Item |
Amount |
|
Revenue |
$5,000 |
|
Labor & Materials |
($2,500) |
|
Gross Profit |
$2,500 |
|
Overhead |
($1,500) |
|
Net Profit |
$1,000 |
In this example:
· Revenue = $5,000
· Net Profit = $1,000
· Profit Margin = 20%
Same Revenue. Different Result.
Now let’s look at another company performing the same $5,000 repair.
Example Job #2
|
Item |
Amount |
|
Revenue |
$5,000 |
|
Labor & Materials |
($3,000) |
|
Gross Profit |
$2,000 |
|
Overhead |
($1,500) |
|
Net Profit |
$500 |
In this example:
· Revenue = $5,000
· Net Profit = $500
· Profit Margin = 10%
Both companies generated exactly the same revenue.
One company earned twice the profit.
That’s why revenue by itself can be misleading.
What Does This Mean Over a Year?
Now let’s assume both companies complete 200 similar jobs throughout the year.
Company A
· Revenue per job = $5,000
· Profit per job = $1,000
· Profit Margin = 20%
· Annual Profit = $200,000
Company B
· Revenue per job = $5,000
· Profit per job = $500
· Profit Margin = 10%
· Annual Profit = $100,000
The revenue is the same.
The number of jobs is the same.
But one company generates an additional $100,000 in profit.
That’s the difference between measuring activity and measuring performance.
Growth isn’t Always the Goal
When business owners want to improve results, the first instinct is often to focus on growing revenue. And sometimes, that’s absolutely the right answer. But not always.
I’ve seen companies work incredibly hard to increase sales only to discover that very little of that additional revenue actually reaches the bottom line.
Growth by itself isn’t the goal. Healthy profitable growth is.
If every additional dollar of revenue creates more stress, more labor, and more scheduling challenges, and very little additional profit, is that really growth?
Small Improvements Add Up
Often, the biggest opportunities don’t come from selling more.
They come from operating more efficiently.
For example:
· Reducing callbacks and return trips
· Improving scheduling efficiency
· Increasing average job value
· Reduce material waste
· Improving crew productivity
None of these changes may dramatically increase revenue. But they can significantly improve profitability.
And those gains compound over hundreds of jobs throughout the year.
An Exercise Worth Trying
Here’s a simple exercise to consider.
Pull three completed jobs from the last month.
Don’t just look at revenue. Instead, also consider:
1. Labor costs
2. Material costs
3. Overhead
4. Net profit
5. Profit margin
You may discover that some of your most profitable jobs were not your biggest jobs. And some of your biggest jobs weren’t nearly as profitable as they appeared.
That information can help guide decisions about pricing, scheduling, staffing, and growth.
The Bottom Line
Revenue tells you how much work you completed.
Profit tells you how much value that work created for your business.
Both matter.
But if I had to choose one metric to watch, I’d choose profit every time. After all, you can’t deposit pure revenue into a bank account. You can only deposit profit.
So, the next time someone asks how business is doing, don’t stop at revenue. Ask the more important question:
“How much did we keep?”