Your Top Line Is Fine But You’re Not Making Any Money. What’s Going On?

This is a case worthy of Sherlock Holmes. More time, effort and energy is spent chasing the solution to this small business mystery than nearly any other!

We’re not talking about temporary downturns. This is the chronic inability to turn the top line into steady positive cash flow, profitability, strong net income, and an overall vibrant business.

In my experience, well over half of established small businesses experience some of these symptoms at least once in their lifetimes:

  • More than 12 consecutive months of break-even financial performance
  • Frequent inability of the owner to pay him/herself in full or in part
  • Frequent inability to pay vendors, suppliers, service providers and employees on time and in full
  • Bank lines of credit are maxed to pay for day-to-day operating expenses
  • Insufficient cash flow to invest in growth
  • The business is persistently insolvent

What’s the most common solution small business leaders apply? If you guessed “more revenue,” you win the prize. And it is dead wrong!

The endless quest for more revenue is the single biggest reason small businesses don’t consistently make real money.

You Drive for Show and Putt for Dough

This golf metaphor also applies to business. Real, usable money is made after revenue is generated. Revenue is the beginning—the “driving” in the metaphor—not the end point, which is consistent profit and robust cash flow—the “putting.”

Focusing most or all of your energy on the top line is like looking into the wrong end of a telescope. It distorts and diverts from the equally important elements that transform revenue into real-life operating profit, positive cash flow, net income and, ultimately, your taxable income. This leads to an unbalanced management of the business.

You cannot sell your way out of the problem. Period. Give it up and turn to what actually enables your business to earn money.

You Are in Business to Make Money

You didn’t start and run your business to just generate revenue. Your top line won’t pay your bills. Or fund your kids’ education. Or buy a home. And you can’t run your business solely on it.

Only real profits, consistent positive operating cash flow and strong net income do those things.

Cash really is king. You’ve probably nodded every time you’ve heard this. Here’s the question: Are you running your business to produce positive, consistent cash flow?

If most of your day-to-day focus, energy and actions are about generating sales, you are playing the wrong game.

It’s Time for a Game Changer

Start by understanding the concepts of gross profit and gross profit margin. Here’s the formula for gross profit:

Top Line Revenue  − Direct Expenses to Make and Deliver Your Product or Service  Gross Profit.

Gross profit is expressed in dollars. Gross profit margin is expressed in percentages. For example, your gross profit is $100,000 and your gross profit margin is 50%.

They are the gateway on the road to robust and sustainable small business success and health.

Need to know more? Talk to your accountant. In the meantime, this is a good, plain English definition of gross profit margin:

Here are some other culprits behind the mystery of “we’re not making any money”:

  • The pricing for your products or services isn’t high enough to support a strong gross margin
  • Your operating expenses aren’t aligned with your gross profit and margin and are starving your net cash flow
  • You don’t charge customers for all the services you perform, so your business leaks cash flow and profit
  • Customers frequently pay you long after the agreed-upon payment terms and you do nothing about it

You don’t need Sherlock Holmes. All the clues are there. Make sure that that you aren’t the wrongdoer!

Key Ideas

  1. If your top line is OK and you’re not making money, it’s no mystery. This has a clear cause that can be changed.
  2. Stop obsessing about revenue to the exclusion of everything else. More sales isn’t the answer.
  3. Pay as much attention to your business’ financial performance as you do to sales and marketing. Put this into a process and system that you rigorously execute.
  4. Actively manage your gross profit and gross profit margin. Become an expert in these areas and constantly look for ways to improve them.
  5. If you believe small business success is just about selling more, you’re playing the wrong game. You are practicing “driving” and overlooking those parts of the game where the money is—in “putting.”

Any reactions? Let me know.