2-Minute Business Lesson
Beyond Revenue – Measuring Company Performance
The Case Study:
Ginny Martin, owner of Academy Publishing, knew she could dominate the educational textbook industry by creating graphically superior textbooks coupled with third-party evidence of increased academic outcomes. In addition to being spot on with her product, she had hired a team of salespeople with strong connections to the education market. The magic was working.
When any employee logged in on a company-owned device, a dashboard showing monthly and annual sales-to-goal numbers appeared. The goals were aggressive and the numbers impressive.
Ginny loved to include her employees in celebrating her company’s success. Bonuses, concert tickets, gift cards, happy hour Friday in her office were all testament to sales numbers exceeding the monthly goal. Hers was a company that sales people dreamed of. She was a believer in very publicly recognizing the performance of her winning team, and employees in all positions – not just sales – got in on the goodie bag.
But after the third consecutive year of double-digit sales growth, Ginny had to shutter the business she loved.
What happened? Her product was outstanding, the sales team had trounced the competition and the company was receiving international attention for its entry into the marketplace. Ginny was looking at the wrong number. Academy Publishing was losing money year after year.
Stop looking at the sales numbers as the basis for company health. Revenues only represent one number, one measurement of how a company is performing. That one number alone is meaningless until you look at the cost of goods sold, the cost of doing business, how cash is managed and what the margins are. Company success shows up on the balance sheet, not the income (or profit & loss) statement. Yes, the income statement holds powerful information on performance over a specific period of time; say a month, a quarter or a year. But you can’t just look at revenues. The bottom line, net earnings is the key number on the income statement. When that number moves to the balance sheet, then and only then, will you see the full picture and learn if the business is making a profit.
Revenue numbers are easy to measure and can get people easily excited. But if you have underpriced your product, or overspent on direct or indirect expenses, you simply cannot sell yourself out of trouble.
The sales team can focus on sales incentives, but rather than engaging your whole team on revenues, get them excited about profit margins. Base incentives on the bottom line. How can they operate more efficiently? Can they get suppliers to lower costs, find a less expensive shipping method, reduce waste, or secure discounts on media buys?
Ginny never rewarded any of these accomplishments and her business failed because of it.
Mary Rogers is a small business expert based in Traverse City. She has helped hundreds of businesses to launch and grow. Contact her at email@example.com