This week I want to focus on Revenue. I am hoping that you walk away with a couple of insights to increase your sales.
We are talking about Revenue. I am going to put up the profit equation, and you will see that revenue is the starting point for this equation. You see this when you look at the income statement for any business. It starts with Revenue and then your costs are subtracted. So revenue is really important. In this video we are going to discuss the three main concepts you need to understand about revenue.
- There are only two ways to increase profit. Business is actually pretty simple. There are only two things you can do: increase your revenue or decrease your costs. The problem for a lot of businesses is they only focus on one thing. You might have a business leader who is just focused on cutting costs. It is important to remember there is a second lever you could be using to drive profits.
Now I might get a smart comment from someone saying, “hey, there is a third option. You can do some fancy financing, raise debt, and get a bunch of money.” Fancy financing is not real profit. I am talking about true operational profit. There are only two things you can do: increase your revenue or decrease your costs.
- Cost and Revenue are different. These represent two fundamentally different business activities. The problem a lot of people have is they will look at this equation, and they will see a bunch of numbers. When you see a bunch of numbers on a page, things start to look very similar.
It is important to remember that cost and revenue are two very different things. Cost is about self-discipline. When you are building controls to manage cost, it is all about building discipline into your organization around your expenses. Revenue is different. Revenue is about creativity. You are looking for ways to increase value for your customers. What new products can you create? Can you go after new customers? What new markets can you enter? Everyone in your organization should be asking the question, “How do I bring in new customers?” You are coming up with creative solutions to your customer’s problems, and in return, you are going to grow your sales.
The reason I am bringing this up, is the difference between revenue and cost is so dramatic. Revenue is about expansion, whereas cost is about contraction. You want to expand your revenues, while keeping your costs at a manageable level. This impacts the day to day decisions of running a business. You cannot apply the same decisions to revenue that you do to cost.
- Revenue is better than cost. This idea is so powerful to understand. Revenue and cost are not equal from a mathematical perspective. When you look at the profit equation, you want to decrease cost and increase revenue. The problem with cost is that you can only decrease it so much. Once you hit zero, you are done. Revenue is different, because there is no ceiling . Theoretically, you could increase revenue forever. Now practically speaking, you cannot really increase revenue forever, because there are only so many people in the world who can buy your products. But I think you see what I am saying. There is a floor to how much you can lower cost, but there is no ceiling to how much you can increase revenue.
This concept explains why businesses spend so much money to hire good sales people. It also explains why companies spend so much money on business development. Revenue is important. So for your situation in your business, what the profit equation is telling you, is that if you have a choice between investing in cost cutting or increasing revenue, all things being equal, you should invest in revenue.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.