One of the most common misapprehensions in business is to think that a company with tremendous revenue is a successful company. Headlines rejoice when businesses hit the dreaded 100 crore, 1,000 crore or even billion-dollar revenue mark. Entrepreneurs say out loud their impressive sales numbers, analysts tout the graphs of a company’s acceleration and media pubs speak of rapidly scaling up turnover of companies.
But this doesn’t necessarily mean that there is only a good story behind the numbers. While some company may bring huge revenue, it doesn’t mean that this company’s making money. Conversely, a single firm’s earning a small revenue, they still make good profit every year.
This begs an interesting question that every entrepreneur/startup founder/investor/business owner will encounter at some point once scaling begins: what actually matters-the revenue or the profit?
Can I pick revenue or profit? No, it is not so simple. Revenue and profit are measured for different reasons, tell a different story about a business and drive a business in different directions.
If entrepreneurs are able to understand where these two have a relationship then they will be able to develop sound, healthy businesses, reduce the occurrence of financial problems and generate sustainable value.
Understanding Revenue
Revenue is defined as the income made by a business from the sales of goods and services up to a point before the deduction of expenses.
What is 10,000 sold at 1,000 (a lakh)? 1 Cr. What is revenue? Revenue is the top line of a company’s profit and loss account.
In a business, revenue is the first indication that customers will pay for a product or service. An increasing revenue is an indication of increasing demand, powerful marketing efforts, an increasing market penetration, etc.
Revenue is perhaps the most visible business metric because it is an easy concept to understand and track. Growth is often reported on by media companies and used by investors or customers based on revenue.
Revenue does not tell whether company is actually making any profit.
It’s possible to sell an enormous number of units of a product and still lose money on every sale.
Hence, this is where profit ratios come in.
Understanding Profit
Proast is the amount of money left after all you have deducted from raharaore.
This could be the employees wages, the rent, raw materials, use of technology, marketing costs, tax, utilities and other business overheads.
Profit is the real amount of benefit that has been made from a firm.
Calculating profit: If a firm makes 10 crore and have expenses of 8 crore, it profits 2 crore.
Profit gives business model sustainability. Revenue does not.
A firm that achieves profits all the time can afford to:invest and grow, survive during slumps, reward shareholders, grow without the need for external financing.
Using pure profit, it’s arguable that a company is in good financial shape as it is cash positive, in other words, the value created exceeds the value used up to do so.
Why Revenue Gets More Attention
Entrepreneurs are often much more comfortable talking about revenues because it’s easier to demonstrate.
As revenues rise, people get excited. Revenue growth is exciting in that it demonstrates forward motion, customer receptivity and market favor. High revenue figures are likely to generate press, interest from investors and strategic relationships.
Evolussuggests that for startups, growth in revenue is often evidence that the product is delivering a solution to a known problem.
The best indicator of which 16 companies to track may be its sales growth rate. A fast growing company looks very successful despite its lack of profitability.
This pattern is especially true in technology startups. Most high-growth corporations are interested in growing a market first, before concentrating on profits.
Their approach to managing their business is gaining customers, gaining awareness of the brand, and gaining share of the market, before improving profitability.
Thus, the headline figure is revenue.
However, referencing revenue alone has the following dangerous blind spots:
Why Profit Matters More Than Most Entrepreneurs Realize
Profit is what determines if a business will thrive in the future.
A company can sustain periods of loss if income grows rapidly and is well-funded, but no business can afford to operate at a loss forever.
So, all of that will have to be paid for in the end.
Profit gets you the freedom. Being profitable allows companies to develop new product lines, hire innovative people, modernize technology, and even move to new markets without being dependent solely on outside sources of capital.
Profit provides a cushion when the country is not doing well financially.
If the market makes conditions more difficult, then companies that have achievable business plans tend to be more resilient than those which rely on ongoing funding.
Most significantly, profit proves that a business model is sustainable.
A firm that regularly earns profits has shown it has created true economic value.
The Startup Perspective: Why Some Companies Prioritize Revenue
Numerous entrepreneurs believe that profit should not be the goal in all circumstances.
For some product categories, such as technology and digital platforms, growth is even more crucial during early stages.
Think about businesses like ride-hailing companies, food delivery firms, or social media networks.
So they tend to spend a lot on acquiring new customers, marketing, infrastructure and new product development.
Market dominance should be achieved before getting close to the leading edge.
You could be in the red in this stage. To make profits it is important that you know the product profitability.
Investors usually accept such losses under the optimistic expectation that profitability will materialize at some stage when the firm reaches a certain size.
Many successful companies have used this method.
But it only works when there is a definite way to make money.
Excessive growth leading to no eventual profit is dangerous.
The Dangers of Chasing Revenue Alone
A lot of entrepreneurs get completely fixated on selling more-they’re totally unconcerned with profit.
This method pose a number of risks.
Secondly, high revenue may deceive business owners into thinking that they are a successful business. Such owners might think that their business is already successful even before it really is.
Secondly, in order to strive for an aggressive income growth the company should spend more money. The marketing budget is growing, costs of operation are being increased, the speed of hiring the staff is becoming greater;
Profitability gets worse if revenues grow less than costs.
Third, firms that focus only on the sale may take on unprofitable customer relationships or use large discounts to inflate figures.
Improving the numbers of the short-term might come at the cost of the long-term financial viability.
History is full of examples of companies that have enjoyed remarkable revenue growth, only to then fail because they were unable to develop Profit Streams.
The Power of Profit-First Businesses
However, there are some entrepreneurs who go the other way.
Rather than engine aiming for growth at all costs, they concentrate on profitability right from the outset.
They keep costs under control and have healthy margins while demanding growth.
Here is an example from India, Nithin Kamath and the onward growth of Zerodha.
Importantly, most of the startup exits and high valuation deals can be attributed to the fact that most of these startups raised significant amounts of money from external sources. Zerodha was different. They focused on making money and creating value for customer.
The company steadily expanded also while making significant profit showing that profitable, sustainable business models can compete effectively with heavily funded rivals.
Profit-first organizations tend to have more autonomy, as they are less dependant on outside investment and funding.
Their financial security enables them to at least rationally develop each decision on strategic, not tactical grounds.
Revenue Without Profit: A Real-World Example
Suppose two companies.
A reports sales of 100 crore a year but spends 105 crore in running the business. It is losing 5 crore every year despite huge sales.
Company B’s revenues are 20 crores a year and is spends 15 crores a year. Despite its sales being way below, it makes 5 crores while the other profit.
Which company is in better health?
Most fellow experienced entrepreneurs would go for Company B.
Company A, although bigger, profit losses imply financial risk. Company B. Is creating real value and can survive without backup.
This is just one example of why revenue and profit should always be examined together.
What Investors Look For
When do investors prefer particular types of funding? Investor preferences are usually stage dependent.
The early stage investor is likely to be more alert to “growth in revenue” as an indicator of demand for the product and the potential to scale.
Nevertheless, as a firm develops, profits are evermore crucial.
Investors need to see some proof that the business can bring sustainable returns.
A public company is normally measured on its revenues, profit margins, cash flow as well as growth revenue.
Nature of businesses having maximum valuation were those where revenue was growing fast along with a good bottom line.
The sweet spot for investors both media intelligentsia and Me is the confluence of growth and financial discipline; it is this that convinces.
Finding the Right Balance
A distinction can be artificially created by political debate.
In action, good business and effective management require them both.
Revenue is a growth enabler, an enabler of market expansion, and an enabler to acquire new customers.
Profit is a prerequisite for sustainability, sound financial position and long term resilience.
Entrepreneurs need to be sure not to become too obsessed with one of the metrics at the expense of the other.
A profit versus growth business may find it hard to compete.
A business dedicated to nothing but growth and devoid of a profit motive may simply run out of resources.
The most successful companies balance revenue growth with a solid bottom line.
What Entrepreneurs Should Measure Beyond Revenue and Profit
Although revenue and profit are the most important indicators, they are just two of the key indicators.
Customer acquisition costs, lcv, cashflow, retention, opex margins and productivity ratios are also significant.
Entrepreneur observedby entrepreneurscan lead to the understanding of more performance indicator’s value.
Revenue and profit, however, are still fundamental as they show if the business is expanding and if this growth is affordable.
All other measurements are simply summed up into one or both of these’it ends.
Lessons for Small Business Owners
Entrepreneurs of small businesses may face battles separate from those of a venture funded startup.
If you don’t have large funding rounds, focus on profitability.
A domestic shop keeper, private business consultant, restaurant or a manufacturing concern will not be able to depend on the investor funds forever.
These businesses should be able to generate enough profit to sustain themselves and grow.
A good approach for small business entrepreneurs is to, stay profitable, and increase sales at a sustainable rate.
FSustainable growth lays a firmer groundwork than fast-growth that costs too much in the long term, financially.
Conclusion
Rev enue and Profit are not competitors. They are complementary indicators that open a different window into operational performance.
Revenue indicates demand, growth and reach. Profit indicates sustainability, efficiency and financial health.
Revenue is such a popular metric among entrepreneurs because it captures something tangible. But profit is actually what matters in the long-term whether a company can survive and grow.
Top companies appreciate that there is danger in the accumulation of profit without growth, as well as growth without profit.
The key to growing a business is not either revenue or profit but the combination of both.
When revenue growth is accompanied with healthy profitability, businesses have the resources, flexibility and resilience to last long.
Eventually, the revenue may be an eye catch, but it will be profit to keep the door open.
FAQs
What’s the distinction between revenue and profit?
Revenue is the gross income of a sale, before expenses were incurred, and profit is the gross income of a sale minus expenses.
What do we need the revenue of a business for?
Revenues signify customer demand, growth in the market and the magnitude of any business activity.
Top 10 reasons profit is more important than revenue?
Profit indicates if a business is economically viable and able to create wealth, once costs are deducted from revenues.
Is it possible for a firm to generate high revenue and low profit?
Yes. Many companies sell huge volumes but suffer from enormous operating costs, leading to poor or negative profits.
Startups should be concerned about the revenue?
Depends on the business model. Some startups do growth first and profitability thereafter. They should have a Roadmap to profitability in the end.
How do we decide what proportion of revenue and profit is right?
Sustainable growth is the optimal way forward. This is when sales always increase with profit margins being large enough to sustain the business.
