Why A Bigger Revenue Number Doesn’t Mean a Healthier Business

Did you know that before we can talk about profit, growth, or how much revenue you want to make, you need to start with what it actually costs to run your business?

That starts with two things: COGS and Expenses.

COGS, or Cost of Goods Sold, are the costs directly connected to delivering what you sell. If you don’t make the sale, you generally don’t have the cost.

For a contractor, this might be materials and the crew completing the job. For a marketing agency, it could be staff working on client campaigns. For a bookkeeping firm, it could be the employees directly working on client accounts.

Expenses are different. These are the costs of operating your business whether you make one sale or one hundred. Think software, insurance, rent, administrative payroll, marketing, accounting, and other overhead.

Your Profit and Loss report separates these because they tell you different things.

Gross Profit = Revenue - COGS

Gross profit helps you understand whether your product or service is priced profitably before paying the rest of your business expenses.

Then:

Net Profit = Gross Profit - Expenses

Net profit helps you understand whether your business is profitable, but it does not tell you everything about your cash flow. Money can leave your bank account for things that appear on your Balance Sheet instead of your P&L, such as loan principal payments, owner distributions, or certain asset purchases.

That is why I want business owners looking beyond the bottom line of their P&L. If money is leaving your bank account, then we will want to account for it, whether it appears on your P&L or Balance Sheet.

My dream, as someone who has owned eight businesses and sold three of them, is that this is where more business owners start shifting their thinking when they start setting their revenue goals.

It is common to say, “I want to grow revenue by 10% this year.” But what will that additional revenue cost you to produce? Do you need another employee? More materials? Additional software? More marketing?

You can grow revenue by 10% and still make less money.

You can grow revenue while your debt grows even faster.

That is why I start with costs of goods sold and expenses first instead of revenue goals

Profitability doesn’t start with making more money.

It starts with knowing what it costs you to make it.

DIY your budgeting and cash flow by getting my workbook: https://myonlycfo.com/the-stop-method-annual-budgeting-workbook/

We are launching the CFO Advisory Institute, made for Accounting Professionals. Join the waitlist here: https://www.crystalnoell.com/waitlist-cfo-advisory-institute