It’s easy to get captivated with gross revenue figures. Nearly every business interview or company profile focuses on it. And business owners love to talk gross revenue when bragging about their company.
By way of recap, gross revenue refers to the total revenue generated by a company from its primary business operations before deducting any expenses. It represents the initial financial inflow, highlighting the company's ability to generate sales or service fees.
On the other hand, net income is the final profit figure that remains after subtracting all expenses, including operating costs, taxes, and interest payments from gross revenues.
So while mentioning gross revenue is somewhat understandable because it gives you an idea of the size of business, it’s an utterly irrelevant metric for determining if a business is actually successful and profitable.
Consider the obvious – which would you rather own:
- A retail microbusiness that grosses $1.8 million a year, but has cost of goods, staffing, and other operating costs totaling $1.75 million.
or
- A service-oriented microbusiness grossing $500,000 a year, but with staffing and operating costs of $225,000.
Without question, the first business would tend to get more attention and bragging rights due to its higher gross revenue. But the second business is obviously far more profitable (and quite possibly less headache as well).
And let’s face it: we’ve all seen situations where big revenues are being generated but a clueless owner is running the business into the ditch.
The only things that really matter with your microbusiness are:
Are you meeting a specific need for clients/customers?
Are you good at what you do and enjoying it?
Is the business operating efficiently and generating a level of profit that meets your standards?
If the answers are all “yes” then nothing else really matters. There's no reason for you to envy other owners just because their business has higher gross revenue.
Feel free to contact me if you'd like to explore ways to make your microbusiness more profitable.
The McClanahan Tax Blog is for informational purposes only. See Disclosures page.