Top-line growth overrated

You’ve seen community business
awards for fast growth and plaques
doled out to companies for their “dramatic” performance increase. But
what numbers do those awards recognize, and are they a true indication of a
company’s success?

“Revenues drive a business, and there’s
no arguing that, without top line, a
healthy bottom line would be hard to
come by,” says Ryan Bailey, Chief
Financial Officer, DYONYX, Houston.
“But to maintain financial success, you
must control costs and monitor revenue
structures to ensure that your sales are
generating the profit your company
requires to truly thrive. The ‘net’ bottom
line gauges the effectiveness of these
techniques and alerts management to
unexpected results.”

Smart Business spoke to Bailey to
learn ways that businesses can convert
top line into a profitable bottom line and
plan for future success.

What confuses people about top-line revenue versus ‘net’ bottom-line numbers?

Top-line revenue gives the public a
snapshot of your business. By using this
number, outsiders can compare industry
benchmarks to make assumptions about
a business, such as the number of
resources, rate of growth, expected profits and even ballpark company value
based on a specific industry.

Internally, revenue assessment provides
management with insight into the productivity of the sales force as well as an
indication of the overall direction of the
business. While such valuable information is derived from analyzing revenue,
top line does not paint the entire picture
as to the success of a business.

The bottom line is more telling of a
company’s performance. In a sense, the
bottom line is the report card for a management team answering several key
questions: How effective are operations?
Are costs within the budget? Is the revenue model properly structured? The
value added from answers such as these
is why ‘net’ is the true metric to gauge

What are the first steps toward improving
the bottom line?

An often overlooked management tool
to increase the bottom line is to simply
analyze the profit streams. Every management team should understand what
drives profitability for its company and
define the measurement of those drivers.

For instance, management at our company keys on resource utilization and
overhead burden knowing that resources
are actually our profit centers. As such,
our management regularly reviews both
utilization and profitability reports to
ensure that expectations set forth for utilization rates still translate into desired
profitability. No matter what factors drive
a business, management teams must be
able to identify and control these variables that affect the ‘net.’

Another valuable step in improving
profits is the use of a budget. The budgeting process will reinforce your pricing
models to solidify your revenue structure
and provide management expectations in
order to control costs. Continuously
revisit your goals and budget to avoid a
dangerous gap between the top line and bottom line that will, over time, inhibit
your company’s ability to succeed.

What cash flow issues might a business confront if the profit margins realized do not
keep pace with top-line revenue?

If you focus on top-line growth with little attention to the net bottom line, before
too long, the hands of time will catch up
with your diminishing cash reserves. As
companies increase top line, they will
inherently ramp up expenditures and owe
more to vendors and contractors. This is
not a bad thing if you have the profit/cash
flow to pay increased expenses. And let’s
not forget employees. You’ll hire more
people to satisfy increased sales volume.
You need more manpower to fulfill customer orders for products and services.
But if the bottom line doesn’t increase as
the top line surges, how will you pay these
employees? Your margins will continue to
get squeezed by an operation that is overworked but undercapitalized. This happens often in business. The best fix is to
take internal and external inventories of
employees, clients, vendors, operating
costs, etc. You may need to increase
prices or refocus your business if you
have waned from your core services. Focus on the core, meet profit margin goals
and justify resources by ensuring each
(employee) generates billable dollars.

What should management concentrate on to
get to the next level of success?

First, define success. Is it market-driven? Do you want to earn business from
certain customers? Do you want to meet
certain sales goals or increase your profit
margin? Ideally, you will set goals in each
of these categories and also define objectives within your company regarding efficiency. Keep in mind your goals and revisit them monthly and quarterly. Don’t lose
sight of your business drivers and budget,
as in conjunction they can significantly
boost the bottom line. Remember the top
line may be eye-catching, but it doesn’t
define your success.

RYAN BAILEY is Chief Financial Officer of DYONYX in Houston. Reach him at (713) 293-6303 or [email protected].