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 success.
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@example.com.