TMBA 457: Why Does Everyone Talk About Revenue and Not Profit?

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A few weeks ago, Dan and Ian published an episode of this podcast about The Peter Principle, which is the idea that everyone will more or less rise to the level of their own incompetence.

Today, we are talking about a different principle. This one comes from a great 19th century book, The Adventures of Tom Sawyer by Mark Twain.

This episode begins with an excerpt from the book, where Tom is forced to paint a fence and convinces others to help him, eventually managing to get them to paint it for him.

On today’s show, we’re sharing our thoughts on how entrepreneurs can use this same philosophy to lead a great team without working in their business day-to-day.

We’ll also be talking about the progress we’ve made with our new business venture – Dynamite Jobs, and why many entrepreneurs spend so much time focusing on top-line revenue rather than profit.

Transcript

Listen to this week’s show and learn:

  • Why the story of Tom painting the fence is ultimately about leadership. (3:05)
  • The difference between managing people and inspiring people. (5:43)
  • Why it’s important to provide people with a sense of purpose. (8:10)
  • An update on our foray into the world of remote jobs. (17:10)
  • The answer to one of the most common questions that we receive. (24:45)

Mentioned in the episode:

This week’s sponsor:

This week’s episode is brought to you by Bean Ninjas. Most bookkeeping professionals think an Amazon product is rainforest lumber. The Bean Ninjas is a bookkeeping service that specializes in online businesses. The Bean Ninjas are offering a one-hour road mapping session to help clarify where your finances are and what your next steps should be. As a very special offer to listeners of this show, you can get access to that session at a fraction of the regular cost.

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Thanks for listening to our show! We’ll be back next Thursday morning 8AM EST. Cheers, Dan & Ian

Published on 09.06.18
  • Kean Graham

    Nice podcast guys! I think disclosing the gross revenues can be a bit misleading sometimes and the profits do not tell the full story as you mentioned. Plus, profits can be a bit too personal of a disclosure for many entrepreneurs.

    I think the most revealing income statement metric is the net revenues. Some businesses inflate their gross revenues by having very high cost of goods / sales or accepting revenues on their partners behalf which leaves them with very little gross profit for the operations of their business. I always get a clearer picture of a business once I find out their net revenues. It’s the happy middle between gross revenues and profit.

  • Interesting I’ve never used the term ‘net revenues’ do you mean this:

    https://investinganswers.com/financial-dictionary/businesses-corporations/net-revenue-2616

    Revenue minus returns and discounts, or were you aiming for a metric like sales – COGS?

  • I really enjoyed this pod, especially the positivity about inspiring others to join you and get behind your mission, not just hiring people to follow SOPs. See you in BKK!

  • Tom Hannon

    Kean – I agree the health of a company is the net revenue or ebita, top line revenue is very misleading. If there is no profit the company unless it is unique has no value. However you do need to look for golden nuggets, sometimes there is a short term debt being paid effecting the net income. A mistake many entrepreneurs make is investing in their business. Example – for a newer product like Dynamite Jobs you absolutely have to invest. However for a company several years old with a few million in revenue investments vs keeping the income gets very dicey. One strategy to use is this, take all the money out of the company as income as it comes in. Then when it comes time to reinvest try writing a check back to the company. I can assure you the mind set will change very quickly as to what is needed vs not. I was lucky to exit all my businesses as was Dan and Ian, but most people don’t and the investments in the company become lost money they could have in their own invest accounts instead.

  • Kean Graham

    Yep, exactly! There are several other terms for it like Gross Profit.

    For example, an Amazon FBA’s Net Revenues would discount their production/supplier costs. Think about the vast difference of these two Amazon FBA businesses:

    Business 1 sells toothpicks for $0.10:
    Gross Revenues = 100,000,000 toothpicks = $10,000,000
    Cost per toothpick = $0.099
    COGS = 100,000,000 *0.099 = $9,900,000
    Net Revenue = $10M – $9.9M = $100k

    Business 2 sells refrigerators for $1,000:
    Gross Revenues = 1,000 refrigerators = $1,000,000
    Cost per refrigerator = $900
    COGS = 1,000 * $900 = $900,000
    Net Revenues = $1M – $900k = $100k

    Is the toothpick company 10x more successful/larger than the refrigerator company because the Gross Revenues are 10x higher? No, they are merely selling a product that tends to be high volume and has a low gross margin. However, as you can see, the Net Revenues tell a more accurate story with both of them being at $100k.

  • Kean Graham

    Yep, I agree with most of what you said. Even the EBITDA can be misleading though. Take many of the typical VC invested Silicon Valley businesses. Most of them grow their companies like wildfire to invest in long-term growth and plan for EBITDA and net profit that will be no higher than $0. Should a Silicon Valley business that is on-track to become the next Unicorn be measured on their lack of EBITDA?

    That is why I think Net Revenues is the most versatile metric to tell an accurate story across most companies. However, there are always exceptions :)

  • Tom Hannon

    Kean – For most businesses, not all, the money they earn the owner is all the owner will ever see and is the ultimate value of the company 1-3X. The business needs to earn enough for the owner for the owner to want to stay in business. Which is why the “Net” is vital for companies. I forget the exact number but I think it is 85% of businesses do $750K or less in total revenue. Depending on who you listen too about 20% actually have an exit, and it may be even less for companies less than $10M, simply because there are just not enough buyers in this arena. If you have something unique and special that fall outside the typical guide lines good for you, but it is very rare.

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