Context is kingJan 01, 2022
Every founder cares about the top line – how much revenue is coming in. This number is almost impossible to miss (although certainly possible to miscalculate), you probably live and breathe it, and that is all good.
However, looking at revenue sans context can lead you into the danger zone.
Typically, it goes something like this: “Our revenue grew 100% this year, we’re doing great! Champagne and pizza for everybody, and no further analysis needed.”
Hold the bubbles.
How is this growth looking relative to your costs? If your revenue grew 100%, but your costs grew 200%, this is a problem – even if your revenue is still currently higher than your costs. Because if you continue this way, it will eventually flip the other way around and you’ll start losing money.
Simple math: revenue of £100K last year increasing 100% each year means £200K this year and £400K next year. Costs of £50K last year increasing 200% each year means £150K this year and £450K next year. Uh oh.
Next year you’ll be losing £50K and, if you keep going at the same rate, you’ll lose even more the year after.
Now you may think, “I’ll worry about it next year”, but that’s too late. Figuring out how to reverse the trend and actually doing it takes a bit of time, so you need to watch out for this red flag in advance.
Go take a look – what’s your percentage revenue increase this year versus last year? And what is it for costs? If the former is higher than the latter, good. If it’s a lot higher, awesome. Otherwise – start figuring out how to flip those numbers around.
Love and cash flow,
Get Tiny CFO in your inbox
Once a week, helpful tips and ideas, no spam or other nasties. Unsubscribe anytime. Promise!