A company’s survival depends on more than just revenue generation. Revenues must always exceed costs.
Managers must know in detail exactly how revenues were generated for the past three years; this analysis should classify revenue by product line, customer, geography, and in any other way that helps to paint a well-defined picture of the true sources of business income.
There are important distinctions between probable and possible future revenues. Probable revenues hinge on maintaining the business already in place; possible revenues come from managing your business with greater expectations.
Managing costs are often the starting point for increasing profits. Before cutting costs, it’s important to exercise the same level of analysis as was used to pinpoint revenues for the past three years.
The three most likely places to start with cost cutting are worker or manager costs, inventory costs, and overhead or processing costs.
Increasing revenue without increasing costs disproportionately is the best way to grow a stellar business.
Many managers too often forget that business income should always exceed the cost of doing business. Deni Tato is a good example. She started her Cincinnati-based business, Contract Interiors, in 1986; by 1992, the business needed a large warehouse for the hundreds of chairs and desks in inventory. Contract Interiors employed some 50 employees. Yet in 2000 the company’s $15 million in revenue was generated against the backdrop of an economic downturn; all that inventory, payroll, and operational cost amounted to a level of overhead that strangled profits. In short order, Deni formed alliances with other local companies and transferred some of her employees to their payrolls, while also offloading her warehouse and delivery trucks. Contract Interiors became a sales and marketing company with a smaller, tightly focused staff of 18 while sustaining revenue levels and boosting profitability.
The Bottom Line
When people talk about the top line and bottom line, they are talking about the difference between revenues at the top of the income statement and what remains at the bottom of the spreadsheet after all costs have been subtracted. The bottom line is the number that represents a company’s profitability.
No matter where a company’s bottom line is today, its managers should—and most probably can—boost its profitability. How? They must ask, first, whether the business can generate higher revenues reasonably, and then whether it can cut costs efficiently.
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