We Want Net Profit Not Gross Revenue

Why is it that so many entrepreneurs focus on gross revenue and not net profit? The illusion seems to be that the bigger the gross revenue, the better job we are doing and the more successful we are. If one runs a multi-million dollar company, the misconception is that he is smarter, better and more successful than if he achieved only one million in gross revenues. Does anyone ever consider that the objective is how much money we make after expenses, not how much money we make before deductions? Too many people believe they will make more if they gross more, not considering or even evaluating the net profits at the end of the day.

Often–too often–I see gross revenues developed at the expense of profitability with huge overhead additions in payroll, inventories, advertising, debt, and most often, reduced profitability for the sake of one more sale by reduced prices. This is madness. Recently, I evaluated a business that had three retail stores and a warehouse. We demonstrated that by eliminating two stores and the warehouse we would reduce gross revenues from $4.5 million to $3 million and make a whopping profit on the one remaining store because of a huge reduction in overhead expenses and payroll. In fact, we were able to demonstrate that the difference of $1.5 million in gross revenue produced no additional profitability at all because the additional cost of doing business absorbed it all. Thus, an easier, more controllable one-store plan was far superior in delivering a better quality of life as well as yielding more bottom line profits, yet the owner of the business still wanted to do a three-store plan. More revenue, so he believed it must be better.

No, my friend, quite the opposite is true but our fixation on how much we gross is very deep and very hard to jettison. Unfortunately, I believe it is all ego-driven, a numbers game with the wrong numbers being played. It’s the net number–not the gross–that counts. I see it every day and it usually comes with two strategies. First, the owner, wanting to elevate revenues without concern for profit, will either lower the price to get the big order or set price below market levels allowing everyone to pick his pocket in exchange for greater gross revenues. You do not make up for this loss by selling more, you just lose more on every sale you make. Second, the owner will typically add sales people and administrative middle management to manage the growing business without concern for the costs associated with the labor and related overhead requirements, thus selling themselves into oblivion with low-profit sales inadequate to cover inflated overhead. These are two direct paths to crisis and loss.

If only business owners were as focused on net profits and controlled overhead, making only profitable sales and leaving behind loss leaders and cut prices, saying no to the price gouger who promises huge sales at ridiculous prices. If one exercises sound business practices, one will experience reduced revenues but increased profits. That’s good. That’s smart.

So which is best, gross revenue or net profit? I vote net profit. Every time, learn to say NO to price gougers! Hire fewer employees and put as many as possible on incentive-based reward systems, commissions and low draws, match sales revenue to salespeoples’ earnings, attach workers’ earnings to productivity and on we go. When next discussing your business plans, look hard at the bottom line and explore alternative strategies that are less expensive with reduced overhead and that hold profitability with effective pricing that throws profits to the bottom line. Say no to low-margin sales. It’s net profits we want, not gross revenues.