Clearly without top line growth, there will be no long term success.
Revenue growth is the best feedback as to whether your value proposition is sufficiently positioned for growth and that your strategic plan is working.
Cost containment is certainly important but more tactical in nature. (if only we could eliminate all cost, think how much money we could make?) However, bottom line growth resulting strictly from cost containment will not provide long-term success. Too often when there is a short term contraction in revenue, the first reaction is to slash and burn costs without regard to the long-term implications or its impact on your value proposition.
This is a generalization, but one based on experience; when was the last time someone (CEO, CFO, COO) actually ask: Is this revenue drop structural or cyclical? The question and response, in my opinion, are absolutely critical to the survival of the businss and rarely asked.
If structure, then you need to rethink your value proposition for appropriateness in the current and future environment in order to re-establish positive revenue growth.
If cyclical, then short to mid-term targeted cost containt makes sense. But your current value proposition should continued to be sufficient. Though you should always be evaluating your value proposition not just in the present but for the future as well. This is the heart of strategic planning.
Top line revenue growth is essential to long term success. And, cost control does not necessarily lead to the bottom line. Far more important than cost control per se is cost effectiveness and value-added outcomes from spending.
Long-term success equates to sustainability, which is achievable only via growth: to replace declining/dying businesses and customer attrition plus maintain market share. With more people and more economy,ic activity, if a business does not grow, it loses market share, which inevitably compromises long term success.
At the same time, as necessary as is revenue growth, that alone is not sufficient. Gains in revenue alone do not assure success, for without cost control those incremental revenues may be more than spent. Operationalizing the adage, 'you have to spend money to make money,' more important than controlling amount of spending is the focus on the contributions to productivity and sales of that spending.
Without revenue, resulting from strong sales function, there is no prospect of the bottom line. Without effective management of spending plus control of the costs incurred, there is no bottom line.
Like yin and yang, revenue and bottom line are interdependent.
Agreeing on the inter-dependence, and with the axiom that without revenue there is no business....
I think it is helpful to think in terms of the old BCG matrix.
In more mature markets (Cows), my experience is that cost control is essential. It is far too easy to focus on expanding such markets, because they spin off cash and seem so lucrative. However, you end up chasing business that you don't want, burning cash that you should spend on your growth markets. Cows can last for a long time, and deliberately *shrinking* them to maximize long term profit is sometimes the right decision.
In Stars, in contrast, an excessive focus on cost control (for its own sake) is damaging. This is a mistake I have seen companies with mature businesses make on new ventures and/or rapidly changing markets: their processes are designed to maximize the bottom line, assuming a fixed top line, and they miss the top line growth and become irrelevant in the market.
As most have said, working through more than one strategic turnaround, I have to say top line growth. No viable product or service, no long term revenue or cash flow. Cost control should be part of any annual zero based budgeting exercise. As the product mix may change, so should supporting cost structures.
Cost controls are a "one-trick pony", whereas revenue growth is not.
If we have $100 in costs, at most we can achieve an additional $100. If we have $100 in revenue, we could achieve $1,000, or $1,000,000 or $1,000,000,000,000!
The answer is "it depends on the company and the situation". I have clients that have figured out how to have phenonmenal top line growth but costs are killing them. Similarly I have clients whose business dropped by more than half during the recesion but are now hitting records who have remained profitable through smart cost controls.
Intermediate line - direct margin - and control of indirect costs. Fixating on "top line" can drive low or no margin sales, which are not only unprofitable, but destructive to the market price structure. Cost controls alone seldom, if ever, achieve profitability.
In addition to increasing the revenue and decreasing your costs, it's important to understand the cash flow between the two. What cash do you have available to cover your costs and perhaps have cash available to start a new revenue stream? Or if you need to additional funding, how will your cash be used that makes the most sense?
I agree with Stephen Roulac.
For our business, our primary focus is revenue growth. While profitability is our ultimate goal, as a start up, our initial focus is to 'get in the game'. We recognize that if we grow quickly, we are not going to be able to achieve the level of cost control we would like to. For example, we may need to hire more contractors at a higher rates to meet high demand situations.
Once we achieve sustainability, we can turn our attention to more cost effective ways to run the business. We do remain very cost conscious when it comes to costs we can control (e.g. buying computers and software for our employees).
Top line growth enures more to the long term success of a Company than cost cutting. That isn't to say that prudent cost monitoring doesn't go hand in hand with growth, but the simple axiom that you can not cost cut your way to propsperity is true. This is can be seen in the valuations of businesses for M&A. Comparing buisnesses in segments that are valued based on multiples of EBITDA, a Company that has improving EBITDA but more stagnant growth will not be viewed as favorably as a Company that enjoys more robust growth with relatively less favorable EBITDA. Growth speaks to the opportunity in the future and ability of management to realize it.
A CEO of a tech business I helped grow from $14M to $40M would always use these key focus areas: cashflow, gross margin and profit. He didn't care about top line revenue because if sales reps were paid and incented on revenue instead of gross margin the business would suffer.
The result is we all focused on bringing to market services and solutions that generated good gross margin contribution to the business. Small business lives off cash flow and margin.
I agree that we should always pay attention to making sure we're generating the right kind of revenue. For most companies, different products carry different profitability ratios. All other things being equal, a significant uptick in sales of our least profitable products would likely hurt the bottom line - whereas doing so with our most profitable products would significantly improve it. A lot of times this latter situation is blindly celebrated at most companies. Supply and demand factors need to be part of the discussion because you could have 5 Quarters of margin improvement at the expense of depleting your supply of golden eggs. Now what? I like the idea of balance that Chris suggests. Rigor needs to be applied to the whole profitability evaluation process, not just a party over great gross margin percentages (which is not what I'm suggesting Mi6 does/did.)
I like Chris's view. When I compare public company performance to a SMB in the same or feeding industries I only look at GPM.
A company or industry that is trending up tells me I'll hopefully get fallout (especially from feeder industries). Whereas, NI is totally subjective on a whole host of issues, many (especially in SMB) that have nothing to do or is outside the control of the CFO.
Examples are the padding of payroll with family, over inflated compensation and T&E budgets, etc.
This depends on one's definition of success and the company's position and market(s).
I know a company where their top-line growth year over year wasn't impressive. But they were extremely profitable, retained significant market share and considered themselves successful. I've seen cases of 70% top-line growth year over year in a mature market but with very poor cost structures leading to horrendous GM.
Echoing other comments, I agree that the strategy will depend on which stage the company is operating in. In start-up mode, more focus would be on the top-line while a mature player may focus significantly on cost control with a finger on revenue.
On a different note, has anybody noticed the sharp increase in the number of Anonymous queries?
The answer to this question depends in large part on your industry and your exit strategy. If you're a VC funded tech company with a 3-5 year out, then revenue trumps all. In fact, I'd argue that profitability might work against you in that scenario. If you're a small business with moderate growth and are building for the long term, then spend some time designing a sustainable model with a positive cash flow profile while identifying cost control areas for the times when things get tight on the top line.
As a rule of thumb, if your bottom line (margins) are healthy, concentrate on growing the top line. If your bottom line is anemic, focus on cost controls etc. to improve margins. When those are improved, shift your focus to top line growth.
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