A Dollar of Revenue is Not Equal to a Dollar Saved
Covid has brought out the good, the bad, and the ugly of running a business today. Some businesses are thriving while others, unfortunately, have been killed. Somewhere in between in business purgatory is where most businesses are operating. For these businesses, revenue has declined and expenses have increased leaving the business with a squeezed profit margin compared to last year.
Growth At All Costs
As business owners, you always focus on growing revenue year over year so when revenue falls, sometimes due to unforeseen circumstances like a pandemic, it feels like you’ve been punched in the gut. It hurts to see your business drop by any amount of revenue. All those years of hard work to get to that level of sales and boom, you’re back to where you were a few years ago. It’s like trying to climb to the peak of Everest and as you are ascending out of nowhere bad weather rolls in and you have to go back to basecamp. And like the Tubthumping song from the ’90s, “I get knocked down”, you will get up again.
The thing about revenue is that when you make a dollar, you don’t get to keep that dollar. You get to keep a percentage of that dollar as you have costs associated with running the business that earned you that dollar. Let’s use an example of a restaurant that generates $100 of revenue; $30 goes to the cost of food, $30 covers the cost of the employees making the food, and $30 covers the overhead such as rent and administrative functions. From that initial $100, you are only left with $10 (100-30-30-30 = 10) or a 10% profit margin. If you now grew revenue by $1 to $101 and keep your 10% profit margin constant, you would only be left with $10.10. You only keep 10 cents of every additional $1 earned,
Interestingly, a dollar saved is more valuable to you and your business than a dollar of revenue. Let’s assume you can save $1 in your overhead costs, that full $1 will directly hit your bottom line. Using the example of a restaurant again, the restaurant earned $100 but now costs are $30 for the cost of food, $30 for the cost of the employee making the food, and $29 for the overhead such as rent and administrative functions. From that $100, you are now left with $11 (100-30-30-29 = 11) or a 11% profit margin. As you can see, that $1 in savings dropped right down to your bottom line.
You Work Hard For The Money
Depending on your profit margin you have to work 2x to 10x to generate a dollar of sales than saving a dollar of expenses. If your profit margin is 10%, you need to work 10x more (1/10%=10) or if your profit margin is 30%, you only need to work 3.3x more (1/30%=3.3). Better profit margins mean you have to work less to generate a dollar of sales than save a dollar.
Shifting Focus
Growing EBITDA should be the focus of any business. It’s hard to grow your business revenue year after year after year whereas expenses are more within your control, which may be easier to improve EBITDA. Focusing on revenue is like getting all the troops to storm the beach but you landed 20 miles from the right beach. You now have to trek through sand and unknown territory just to get back to where you wanted to be in the first place; it’s hard work.
To become the most profitable business you can be, step one should be how can we operate the most efficient business as possible by minimizing expenses. That way every dollar saved flows right to your bottom line. Shifting the focus to expense management, especially in a time like Covid is key not only to the survivability of your business but also to optimize EBITDA for your business going forward. I am not advocating to disregard growing revenue, of course, you should. I am saying creating the optimal base will put more dollars directly into your pocket and when you do grow revenue, you will be able to capture a higher percentage of that revenue as more of it will flow to your bottom line.
Leveraging Technology
As you look across your organization, automating process inefficiencies is one of the simplest ways to save money and quickly increase EBITDA. Leveraging technology can increase employee productivity, allow employees to work on higher-value tasks and eliminate human error that costs your business real dollars.
Running a restaurant is no easy task and we are sometimes so busy and rushed, our heads are down leaving us myopic about seeing the whole picture. Covid has done two things: 1) It has provided the time for operators to take a step back and look at your overall operations and business and see what can be improved and, 2) Created opportunities to scale your business and grow market share. Now is the right time to think about investing in technology that will help you scale your business and optimize profitability for the future.
Bradley Bloch is CEO of factura.ai, a cloud-based accounts payable automation software platform that helps multi-unit restaurants with 10 or more locations boost productivity by 12x in one month or less. Through 12 years of working for Scotiabank in private equity, mergers & acquisitions, and finance, he developed a compendium of finance, accounting and business strategy knowledge. He is a graduate of The Richard Ivey School of Business and holds a CFA designation.