Revenue – Costs = Profits

It is the simplest of equations and ultimately the basis for which all business are judged. If it is so important, how come so few folks within an organization understand not only what drives this within their own business but what role they play?

Companies owe it to themselves and their employees that all of their workers understand this. It is a great discipline for companies to possess. It serves as a solid guide to where we are going, who do we need to get us there and how much should we pay prior to creating another job description. This exercise should be conducted on a regular basis to know when to prune in some areas and invest heavier in others. When an employee comes in, they will have a clearer understanding of what success looks like and feel a greater connection to the company.

Each worker should spend time understanding this concept and figuring out their role in maximizing their company’s performance. Everyone is either on the cost side or the revenue side. If they are on the cost side how they, or their department can, create more output costing the company less money? Creativity shoots through the roof when there is a clear beacon for what the future looks like. On the revenue side, it is important to understand how much it costs to bring in the next dollar of revenue. It isn’t good if the company is paying the same for repeat business as new business and it is even worse if it costs more than a dollar to bring in a dollar of revenue. Each person can do their part and it will do wonders for your career long term. People that add impact on a company are the ones that get promoted and will be the leaders in the future.

This practice is even more important in the early stages of a company. I have seen too many organizations spend time on “use of proceeds” yet can’t answer the question of what financial impact a lot of their items will have. Don’t run marketing campaigns if you have no clue what impact it will be. Don’t add 10 new sales people, because you have the money, if you don’t know what their impact will be. Why add those three programmers if you don’t know what they will build is what your paying customers will want? A great deal of a startup is unknown. My advice is to start small and validate the financial impact. Once you know what is working and how it is benefiting your bottom line, make the bigger investments.

A company’s culture where revenue – costs = profits is clear and the entire company is rowing in the same direction is a thing of beauty. It fosters an “us against the world” mentality and just about eliminates internal fighting and politicking. The water cooler conversations are around “how can we get better, how can we get leaner, how can we do more.” How much better would your company be if closer to 100% of your conversations were around that? A rising tide (company), raises ALL boats (employees)!