BUSINESS FORUM: Revenue is not a profit

19 Oct, 2014 - 06:10 0 Views
BUSINESS FORUM: Revenue is not a profit

The Sunday Mail

By Taurai Changwa

IAS 18 defines revenue as income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names, including sales, fees, interest, dividends and royalties.

A simple definition of profit is the amount gained (the revenue), less the amount spent (expenditure). If there is a gain, then that is profit, but if expenditure is more than revenue, then it is a loss. These two terms form the core of every business and in every meeting the issue of revenue and profit should be the most critical of discussions.

It is, however, critical to interrogate what is more important — revenue or profit? Is it wise to spend US$10 to get US$1? For a start-up company, it may be reasonable to lose some money before the company fully realises its potential.

This is only understandable if it happens for a certain period of time. On average, I would say it is normal for a start-up company to be in a loss position for a period of between three and five years before it can make a profit. This varies and some companies can even be profitable within three months. In our Zimbabwean market, there are companies which have been posting losses for over five years now.

I will now highlight some of the weaknesses I have personally noted. Some local businessmen usually get too excited by the prospects of getting more and more revenues for the business.

It is surely a good thing for a company to grow its revenues, but my question is: Are you also looking at the costs to achieve those revenues?

Are you monitoring your expenditure?

For example, if you are excited that your company’s revenue rose from US$500 000 to US$1 million in a period where you have also spent US$10 million in investments, then there is nothing to be excited about.

Financial statements do speak but ignorance at times creates our downfall. Ignoring numbers and not acting whilst we still can is always a ticking time bomb.

Having healthy cash flows in an organisation is always a good thing because you still have the power to come up with ways to turn around your company if you face significant headwinds.

Another huge challenge is that we live in historical glory days often forgetting that times have changed. Because we want to maintain our status and be seen in public, we spend big in order to keep our reputation intact. This is often at the expense of the company.

As a result, poor revenue streams are expediently abused and sacrificed simply because senior company officials want hefty packages and the latest wheels on the market.

I once audited a certain company whose CEO had made the habit of reporting for duty in a Ford Bantam. The company is still listed on the Zimbabwe Stock Exchange, and despite financial challenges which hit almost everyone around 2008, they are still afloat and are now posting healthy profits because they were disciplined and knew how to spend their money.

At a time when the company was plagued by hardships, its turnover was relatively good but the business wasn’t profitable.

And simply because the business was disciplined, it managed to extricate itself from the difficult circumstances.

I feel this is one area we need to improve on.

What leaders do not realise is that the minute they adjust their lifestyle and habits in order to make the business recover, the more the respect they are likely to get from their employees.

So, if your company is not generating any significant revenue, you shouldn’t squander the little that you have.

Imagine how employees who haven’t been getting their salaries are likely to feel if they see the chief executive officer of the company coming to work in a top-of-the-range vehicle.

The amount of fuel you put in that car for the whole month can be enough to pay about five employees in the same month.

Obviously, executives are entitled to enjoy the fruits of their sweat. If you are making profits, yes, go ahead and spoil yourself; but if not, then you better heed the signs of the times.

That money you are spending probably belongs to both creditors and workers. What dividends can you claim title to if your business is not profitable? Humility in business is always key.

In summary, having too much revenue in a company does not justify reckless spending.

Let us monitor the way we spend money in our companies or we will end up shutting down business.

For entities which are profitable, surely enjoy the fruits of your hard work but also ensure that you are always ploughing back into the business and improving operations.

Up-and-down business cycles are normal; the only difference always lies in the way we handle matters when we are down. Accepting that you have failed is the first great step to recovery.

The other is seeking professional advice from peers and colleagues. The “I am a seasoned businessman and I-know-it-all mentality” will take you nowhere.

Other factors that complement prudential business management are proper costing and pricing structures, good marketing techniques, quality products and services and generally a good team.

To sum up, a good captain to the team can surely drive good revenues, excellent growth and maximise on profits.

Never ever concentrate on revenues alone but also look at the broader picture of the whole financial statements and what it means to the organisation.

There are also other factors which are in the statement of financial position (the balance sheet) which affect business, but that is a discussion for another day.

Remember, a lot of hard work is required to achieve good revenues, but even more work and discipline is required to ensure profitability.

Do not spend what you do not have.

Taurai Changwa is an articled accountant and ACCA finalist. He is managing director of SAFIC Consultancy. He writes in his personal capacity and can be contacted at [email protected], or [email protected]. WhatsApp on 0772374784.

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