Nearly every business owner or business leader understands the concept of managing expenses. Yet very few understand how to manage revenue. Since revenue is closely aligned with sales, it’s pretty difficult to manage revenue using the same tools and skills for managing expenses.
Managing revenue means the following:
- Classify your revenue such that you can align the variable (Cost of Goods Sold) expenses with that revenue
- Routinely looking for legitimate ways to increase revenue
- Match products and services to customer needs
- Routinely look at pricing strategies
- Investing in customer relationships
If you think of revenue management as simply decisions about money itself, then you’ll miss the point. Revenue management is all about your customer base, what they need, how you meet those needs and how you price your products and services. If you don’t focus on revenue management, you’ll go out of business.
Running a complex business is different than delivering a complex service or product. Most entrepreneurs are good at the latter and not so good at the former. Because markets, technology, buying habits, customer preferences and competitors are constantly changing, we recommend that you go through a regular process of looking at your product and service matrix relative to what you understand about your customers and then align your company to meet their needs at a price they are willing to pay for. If you can do this on a constant basis, you’ll never go out of business.
When you look at how to increase revenues, the following is presented in an outline format to help distill the basic, available choices you have for increasing top-line revenue:
- Sell more of the same products and services to the same customers
- Sell more of the same products and services to new customers
- Sell new products and services to the same customers
- Sell new products and services to new customers
- Acquire a competitor to reduce competition and gain new customers
- Acquire a non-competitor to enter a new market and gain new customers
There are sub-strategies with each one of these efforts that will require forethought and financial investments. These strategies can be mutually exclusive, depending on other factors. But each of these strategies should not be the end in and of itself: If raw profit isn’t increased by implementing one or more of these strategies, then there’s little reason to engage the strategy.
I work with small business owners – some of the Christian and some not – who lump all their income into a single line item called “Income” or “Revenue” in their accounting system. When I see financials where income streams are lumped together and expenses are not divided into fixed/operational and Cost of Goods Sold, then I know I’m looking at a business that might be profitable but whose owners don’t really understand their own business because they don’t have quality information to tell them if the various parts of their business are healthy or not. While their top-line revenue might be sufficient to cover all their expenses, they might be losing money in one part of their business and not even know it.
Managing income is a pre-requisite to managing expenses. You can’t align variable expenses that are incurred as a result of a sale unless you call out the income from that sale in a separate bucket. For example, you can’t apply a contractors cost of $5000 to a project that earned $25,000 unless you first recorded the income in an income account that doesn’t recognize sales from other parts of the business.
Managing revenue is more time consuming and risky than managing expenses. But it is the life-blood of your business. Growing your profits and revenue is a sure-fire way to ensure the long-term viability of your business.