Revenues and Profits Are Not the Same

by Dawn Fotopulos on May 19, 2014

749 Pictures istock photo 055One twitter follower couldn’t understand if demand for company products and revenues are increasing, why isn’t the business passing on increased profits to employees?

 Increase Revenues Does Not Guarantee Higher Profits

First, you can’t assume an increase in revenues leads to increased profits. Sometimes an increase in revenues has no effect or a negative effect on profits.

If a business has to discount its goods and services, like many are in this tight economic climate, that squeezes gross margin and profits can turn negative.

Revenues are top line. Profits are bottom line after all expenses. They are NOT the same.

Small Businesses Sacrifice More for Employees

Next, even if profits are increasing, you can’t assume the businesses are not benefiting the employees.

The benefits may not be passed on as increased pay; the business may just be absorbing more of the benefits costs. That’s what I hear is happening from many small business owners.

For example, as the cost of healthcare rises, these business are often absorbing a good deal of the the increased in costs on behalf of the employees.

Benefits like tuition reimbursement programs, travel and other subsidies all cost money.

The employees don’t see it because it doesn’t show up in their pay check, but the profits of the business are much lower because of it.

Small Businesses Don’t Always Show A Profit

Let’s remember when a business is showing a profit and generating positive cash flow, management has to save for the slow periods when sales are soft and expenses are high.

If you really care about your employees, you care more about saving their jobs and creating some predictability about the future.

How many small business owners have sacrificed to make a payroll rather than layoff employees? Every single one I’ve ever met. You can’t take profits for granted.

Small Businesses Have Other Expenses Besides Employees

Last, every small business must use profits and excess cash flow to invest back into the business to update computer systems, facilities, and insurance premiums just to keep its doors open.

Did you know that every three years a business should be prepared to scrap most of its hardware assets and upgrade all of its software assets just to keep running? It’s very expensive.

Employees don’t see this expense, but the profit and loss statement of the business feels them. And all these costs are going up, not down.

Cheer Small Businesses That Are Successful

If a company is generating profits, we need to cheer the people who run them. They’ve accomplished the near impossible.

Remember profits help fortify the business when the going gets tough (which it always does).

They help to support a constant employee base even in the lean years.

Don’t assume revenues and profits are the same. Don’t assume profits will always be there.

Why Not Mandate All Small Businesses Distribute Profits!

Mandating that businesses distribute all profits to employees is to ensure small businesses go bankrupt in droves the moment there’s a hiccup in the economy.

Let the market determine the companies that get to survive and thrive. Let customers be the final arbiter if a small business is doing a great job and serving them well.

Let management decide how to manage profits and cash flow otherwise there is no incentive to accept all the risk involved with running a small business.

Let the merit system determine how employees get compensated, not the government. Small businesses will thrive and so will we.




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{ 2 comments… read them below or add one }

Kelly Boros May 30, 2014 at 5:47 pm

“Did you know that every three years a business should be prepared to scrap most of its hardware assets and upgrade all of its software assets just to keep running? It’s very expensive.”

This can sometimes be eliminated by outsourcing some back-office processing. This way there is less wear and tear on company hardware. Another option is to utilize cloud-based systems that do the bulk of the application processing off-site which allows businesses to keep technology longer.

Dawn Fotopulos June 2, 2014 at 3:16 pm

Great comments, Kelly. Do you have suggestions in areas like database management, accounting software and inventory management?

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