Revenue Is a Vanity Metric: Revenue vs Profit for Business Owners

In fact, this is going to shock a lot of people. I don't even care if it falls to the bottom line. What I care about is what's in the bank account and is the bank account growing? Right? Because that's the, we did that in the previous episode of talking about cash versus accounting and it all intertwined. So we all want to grow, but everyone forgets the other part of that.

We want to grow profitably. Right. I mean, these are the margins, right? A lot of people don't even know their margins, right? When we talked about that in the cash flow episode, that obviously accrual based accounting, you look like you're doing great but you got no cash in the bank. So a lot of owners don't know their margins for the business overall, much less around product line, service lines. How dangerous is that?

Extremely, you know. When we look at one group of numbers and we say hey, oh, we're making money, right? But let's say we have three restaurants and we lump them all together and the restaurants as a whole are making money. But when we look at restaurant 1, 2, and 3, 2 is the bell cow, the cash cow, like, oh man, that's his prince money. And 1 is doing okay and 3 is bringing down the entire ship.

So when you start dissecting things, you get a clearer vision. So when we look at marketing, for example, we want to do CAC by channel. Jon, what does CAC by channel mean? CAC by channel? Sounds like a kitten choking on its food. CAC by channel is customer acquisition cost and understanding it by channel means that when you're spending marketing dollars on a specific channel, you know full well what the cost is for the customer you acquire using that channel.

It allows you to make some decisions. That gives you line of sight to whether that channel works for you or not. If you don't break it down like that, you don't know whether you're spending your marketing dollars on the right thing. So yeah, same philosophy applied to business, right? Same philosophy applied to business, right? So you know, and it's the same thing too with owners is that, you know, they like to lump things together or they like to say, you know, I'm really busy, you know, I'm working and this is with a sense of pride and it should be up to a point where, you know, I'm working 80 hours a day, 80 hours a week, you know, I'm working all the time, I'm, you know, I had to miss my kid's bar mitzvah, you know, those kinds of things.

But busy means busy, right? But profitable means profitable. So I actually had a discussion with an owner the other day where they were like, well, look at this guy over here where he's never even in the business and yeah, you know, his business makes money, but you know, you got to be there hardworking and doing those things and the first thing I asked him was why? Right? Is that not the dream? Is this not why you bought your business? It's to be like that guy? Right? To be like that lady? You know that you can actually see things with you. Be with your family. Be present, not being at the kitchen table late at night or early in the morning and worrying if you're gonna make payroll or not. Why? Because you worked 15 hours that day and you deserve to make money? Yeah. The word. It kind of doesn't work that way, right, Jon?

I mean, that's why you gotta have good data and one of those things is CAC by channel or looking at each one of your business units or service lines or product lines and seeing which ones are carrying the company and which ones are not. That gives you the detail. That gives you the detail and that's where you know where to focus your attention. Yeah, then you can make some decisions, right?

So yeah, and we talked about the self-fulfilling prophecy and that need, you just mentioned it again of, hey, I've got to work hard, this is my business, I got to give 110%, I got to be up all night, et cetera, et cetera, but it doesn't need to be that way, right, and I think that's where chasing revenue comes in. You've got to go after the big dollars, you got to go into all the contracts, you're not making a conscious decision about what business you can actually carry or not.

Clearly, as you just said, being able to make those decisions or break things down by line item, product, whatever marketing function you're running makes a bunch of sense for making decisions. But what challenges does a business get into if all they ever do is chase top line growth? And now a word from our sponsor, Structural Wood Corp. Custom roof trusses out of Waddington, New York. Their whole job is making sure your building has structural support.

Ours is making sure your bank account does. One of us charges more. Structuralwoodcorp.com. So it's a vicious cycle, right? We got to add revenue, then we need to add headcount, add overhead, the floor rises, and then we need more revenue to survive. It's called the growth trap, right? It's a vicious cycle. This is a very close cousin to the treadmill. That was an episode one callback, Jon.

It was. Yeah. People say I don't pay attention, but I can't remember. I hope you, it's our podcast, man. You should remember episode one. Let's test our two listeners. You know, the businesses usually get bigger and what happens is that the owners, they get smaller, the owner pay gets smaller, right? So let's take an example. One and a half million dollar business, they have four people.

It's great take home pay, they're at the kids' games, they know every client, and then they're like, you know what, let's grow. I'm gonna chase that top line, right? Sally over here is doing two million, I'm gonna do four. So we go up, we add revenue, right? So now we're at $4 million instead of $1.5 million. And then we add headcount. Well, we're not at four people anymore, we're at 22 people.

If you do the math, the math is way off on this one folks, but it's for a reason, right? And what turns out is that me as the owner, I'm making less money. I'm working 80 hours a week now and I'm not seeing Timmy's ballgame and Joni's gymnastics, right? And I've got HR problems because guess what? Employees are a problem, right? No matter how great the employees are, there's always want more, there's laws, there's all kinds of stuff, right? I mean, you get out the best employees in the world, but HR is just a headache. Spouse is saying, you know, so when exactly are we retiring? And it's really not a question. It's a warning shot in disguise. Right? So, you know, you can't scale chaos. You're just getting bigger chaos when you're following the growth trap. So you built a monster and guess what, tomorrow it'll be hungry again. Mm-hmm. Constantly just back onto the treadmill again. So if revenue isn't this number,

this number that we should be chasing, what should owners be obsessing over instead? So there's three numbers that you really should be looking at. Get out a sticky note or, in your case Jon, under the American flag that you'll tattoo, I want you to tattoo these three things. Okay? One is owner's compensation. Right? So in the Profit First episode, we have a dedicated bank account and all we're doing is funding it before expenses.

You've got to pay yourself first. You are your own best employee. You got to pay yourself like it. And if that is the cost of not growing profitably, then that's fine. Let's go back to that $1.5 million for people seeing the kids' plays. That's worth a lot in terms of not growing profitably. So stop taking the leftovers and start being the first one in line to eat.

The second one is margin by service line. So have your P&L, your profit and loss statement, your income statement, whatever it is that you want to call it, and have it by service line. Have the costing by the service line, by payroll by service line, and you can start seeing what's making you money and what's not making you money and then you can make informed decisions on what you're going to do.

If you want to work your eight hours, fantastic. Fix the problem or get rid of the problem. Grow the cash cow or don't grow the cash cow. But at least you can make that decision. And then the third one is days cash on hand. But just quickly, if it's not services, if it's a service base, maybe it's a client reconciliation, so margin by client as well. Then you can make some decisions about what's coming together.

Yeah. If I've got 15 clients, right, I need to drop cost and see which ones I'm making money on and which ones I'm not. And it's always an 80-20 rule, right? I'm gonna make 80% of my profits on 20% of my services, my products, or my clients, right? The other 80%, right, do I really wanna deal with that headache or not? Can I live without it? Right? Chances are you can. And then the third one, before I was rudely interrupted, was days cash on hand. Right? So if revenue stops, how many days before you get ugly phone calls? Right? How many days does it take for the sheriff to evict you? That's the big thing that you need to know. Most owners, you know, I read somewhere like nine out of ten people in the United States, they're living paycheck to paycheck. There's no savings. And that's the American way where we're not promoting savings, we're promoting buy the next car, buy the next house, do these things.

And they're all from marketers. Of course, that's what they want, is spend, spend, spend. So most owners are 7 to 15 days. They can last 1 to 2 weeks without getting a spot of revenue, right? One bad news cycle and you know you're done for. What we need to be driving for, and this will take time, is you really need to have two to three months, 60 to 90 days, in cash reserves. Apple has hundreds of billions of dollars in cash waiting to swoop down.

They don't need to sell another iPhone before shuttering their business for years. But if their shareholders, they reported poorly on one quarter, oh my God, the sky is falling, the world is ending. So I think revenue tells you how loud the engine is, but these three things tell you if there's gas in your tank and how full and how half empty you are. Yeah, that's gold.

That's gold right there. You know, to our listeners, I just want to emphasize that to mom and dad. When you launch your business, you want to measure those three. Wake up, dad. Yeah. Yeah. You've lulled him to sleep again, Ryan. What the hell? Nap time. Nap time on the podcast. Owner's comp. How much money are you putting in the bank that you have available on a regular basis?

When you're paying yourself, put yourself first. Number two, margin by service, margin by product, margin by client, whatever is the most relevant for your business. And number three, days cash on hand. You should know those numbers. And if you can't get those numbers, you should be talking to your financial people to understand how you calculate them and what you need to do to get them. Because some of those things, you need your production cycle, churning numbers out to be able to calculate those things.

So awesome. And that's a great tease for episode six, Jon. Oh, it is. Yes. I'm trying to remember episode six. Is that the one we just shot? I had a four. That's the one we just shot. Yeah. Yeah. Absolutely. Yeah. Well, just you wait for episode six. We bring in a special guest. It turns into the Brian and Ryan show. Brian and Ryan. Okay. So great. Right. On revenue though, let's connect this, let's connect revenue to exit. If an owner is thinking about selling, does a buyer care about revenue?

Isn't that the most impressive thing that a potential buyer looks at? No, absolutely not. I mean buyers, a sophisticated buyer will look at revenue like a home inspector does, right? Like is it something, is it not something, right? They really want to know what the SDE is, what the profit foundation is, EBITDA, you know, those things where yes, you have a sale but how much of it falls to the bottom line?

How much is the owner fairly compensating themselves or not? Are they skimping corners because they have to? Because they've chased the growth trap. So everyone wants to see revenue going up in a linear fashion from left to right, but they also want to see that the profitability is increasing per revenue dollar as you're getting there. You're getting better at what you're providing. You're getting to provide it cheaper.

And that's really what they care about is that. So they're going to look at your quality of earnings and they're going to take a forensic look at it and say, is the cash flow real or does it survive after this person leaves? Is there a concentration risk for vendors, for suppliers? I mean, the pandemic exposed a lot of concentration risks with vendors, right, in the supply chain and how fragile it is.

So a sophisticated buyer will look at that and say, all right, so let's taste test this, and if it passes the smell test, or taste test at this point, right, this is real, and if it is real, where you do have some sales growth, but it's profitable sales growth, they'll be willing to buy it for you, you know, buy it for far more expensive than if you just have sales going up and you're not making any money out of it.

Yeah, I mean, buyers don't wanna, generally, don't wanna buy a job. They wanna buy cash, right? They're looking at, you know, what's the future earnings from this business and what can I do with it? That's the only reason you're gonna invest your hard-earned money to buy that company. So the sellers, you know, as you work on your businesses, really need to be thinking about, how do I get this into position to sell cash to somebody versus selling a job to somebody?

And then there's a big difference and that's not revenue based. That's, as you said, if it's an SDE, so those are the most important numbers. So if somebody listening has just realized they've been chasing the wrong number, that this isn't all about revenue, what's the first thing they should do on Monday? They need to pull up their real P&L, right? They need to, not the one that's assembled 60 days late, right?

They need to look at the one that is current, ready to go. Right? So I think one exercise you could do is if I fire the bottom 20% of my revenue, how would it go? Would I make more money? And I'm going to tell you something right now. The answer is yes. Right? So you know, I've asked a dozen owners this, and the answer has never been no. You're going to make more money. It's the 80-20 rule. And if you can identify that, I mean if your cousin Ira is part of that 20, then you know, part of that 80, then keep your cousin Ira.

But there's no need to look at it and grow unprofitably. And sometimes it's even better to get smaller on purpose, right? Because now, what if we flip that scenario? I did $4 million in revenue and I had 22 people headcount. I'm not paying myself. I'm working 80 hours a week and I'm not seeing my kids. The husband wants to divorce me because it's just not working out.

It's not the job. It's now a job that I'm making less than minimum wage. But what if I took a step back, fired 80% of my customers that would give me 20% of my bottom revenue. I went back to $1.5 million in sales. That doesn't necessarily work, but we're getting there. I have four headcount, and I'm making more money than ever, and I'm seeing little Sally's play.

What's a better life? Guess what? That $1.5 million with four people is worth more than the $4 million with 22 people that's not making any money. Yeah, it's a more efficient business. More attractive to people. Exactly. Let me ask one more question as well because I think part of that culture of going for revenue is just that willingness to take on more, take on more, and take on more.

How exactly does that break the operations? What's the impact of that on the business that really ends up being so negative? A lot of people operate in silos, Jon. Sales should always put pressure on operations and then operations should put pressure on sales. Let me go out and get an awesome marketing team like Align, right? And they're getting us a ton of sales funnel coming in. Yeah.

Top notch, right? I mean, world class. Yes. And so we have a... What was that? Owner's a bit of a jerk, but you know. It's too polite to say it though. So if we are to, if we get a bunch of sales coming in and then operations has to keep up, we have to add the headcount, then we have to add the fixed costs and then we get that vicious growth trap again, right?

But what if we add what I call the spiderweb effect, right? Sales and operations are in the same room. They're in cahoots on how to grow reasonably and profitably with finance looking in, having those discussions with the owners, right? Everyone is working in tandem, so we have not only growth from a sales perspective, but our margins expand, our cash builds. You know, we don't make desperate decisions.

Our operations are stabilized because we know what's coming not only now through the funnel, what's coming in the future so that we can actually grow in a very planned way. And our teams stop burning out, right? And the buyers will say, I want that company. They know how to do this, right? They know how to scale up profitably. Not only did their margins improve, right, and it went right into their bank account, but they did it in a way that is repeatable and continues to snowball up and take more market share piece by piece, dollar by dollar in a way that their competitors are left in awe.

It's organized. It's staged. It's considered and it's thoughtful across the entire organization. Yeah, staged growth, being able to plan those transition points, knowing when to say yes to certain types of business, knowing when to say no to other types of business or any business whatsoever, you know, having it all planned and mapped out when the organization works together. That's how it should work. You got it. Awesome.

Okay, so let's wrap it up. Ryan, what is the takeaway from this episode? My profits are beautiful. I could care less about my revenue. Profits, owner's pay, run the business on what remains, ruin the bottom 20%, get the spiderweb effect going so that you're not operating in silos, you're operating in tandem. Get smaller on purpose, but get richer on purpose. Awesome, that's a wrap. Thanks, Ryan. Right.

That'll do it for this episode of From Burnt Out to Bought Out. If anything we talked about today hit home, do us a favor, share this episode with another owner who needs to hear it. And if you're sitting there thinking, they're talking about me, good, that's the first step. Head to the show notes and book a free triage call with our team. No pitch, no pressure, just a real conversation about where you are and what's possible.

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