When it comes to business success, many owners love to talk about their revenue figures. It’s an impressive number to throw around at functions or networking events, but revenue alone doesn’t tell the full story. In fact, chasing high turnover without focusing on profitability and cash flow can lead to significant financial strain.

A few months ago, I found myself sitting next to a business owner at an event. After exchanging the usual pleasantries, he proudly shared that his business had a $10 million turnover and 60 employees. While those numbers might sound impressive at first, I immediately knew that turnover wasn’t the full picture.

In today’s blog, we’re going to dive into why revenue is often more about vanity than real success, and why focusing on profit and cash flow is critical for the long-term sustainability of any business.

The Reality Behind Turnover

When this business owner shared his numbers, I did a quick mental calculation based on his industry, and it painted a very different picture than he might have realized. Here’s what that looked like:

• 60 employees at an average cost of $100,000 each (including superannuation, taxes, and benefits) = $6 million in employee costs.
• Operating expenses, including taxes, would likely be at least $1 million.
• That leaves around $3 million in product sales, but given the typical margin in his industry, he’d likely make only a 10% margin, which equals $300,000 in gross profit.

After paying all expenses, his business might be earning less than 3% net profit on $10 million in revenue—if everything runs perfectly. And let’s be honest, in business, things rarely run perfectly.

The takeaway here is that high revenue does not necessarily mean high profitability. A business can turn over millions of dollars and still barely break even—or worse, lose money.

Revenue vs. Profit vs. Cash Flow

It’s easy to get fixated on revenue because it’s a big, impressive number. But here’s the truth:

• Revenue is vanity: It looks good on paper, but it doesn’t tell you much about how well the business is really doing.
• Profit is sanity: This is the number that truly reflects how well your business is performing. After all, what’s the point of running a business if you’re not turning a profit?
• Cash is reality: Profit means nothing if you don’t have cash flow to support your operations. Cash is the lifeblood of any business, and without it, even profitable businesses can collapse.

This is why it’s critical to focus on more than just revenue. To achieve long-term business success, you need to manage profitability and cash flow carefully. Here’s how you can do it.

1. Focus on Profitability, Not Just Revenue

The biggest mistake many business owners make is focusing too much on increasing revenue without ensuring that their profit margins are sustainable. If your costs are too high, your revenue will be eaten up by expenses, leaving little to no profit at the end of the day.

To improve profitability, you need to:

• Manage costs carefully. Look at both fixed and variable costs and find areas where you can reduce unnecessary expenses.
• Optimize operations to improve efficiency, ensuring you’re getting the most out of your resources without overspending.
• Focus on higher-margin products or services. Selling more doesn’t help if the margin is too small. Prioritize offerings that generate better returns.

2. Keep a Close Eye on Cash Flow

Even if your business is profitable on paper, poor cash flow management can lead to serious issues. Cash flow is the amount of money coming in and going out of your business at any given time, and if you don’t have enough cash on hand to cover your expenses, your business will quickly run into trouble.

Here are some strategies to manage cash flow effectively:

• Keep tight control on receivables: Ensure that clients pay their invoices on time. Consider shortening payment terms or offering incentives for early payments.
• Manage payables efficiently: Stretch out your payables (without harming supplier relationships) to improve your cash position.
• Build a cash reserve: Having a “war chest” of cash set aside can help your business weather tough times or unexpected expenses.

3. Profit Margins Matter More Than Turnover

It’s far better to run a smaller business with healthy profit margins than a larger one with slim or negative margins. Bigger isn’t always better. Focusing on turnover without a clear strategy for profitability can create an illusion of success, but it won’t keep your business afloat long-term.

In my experience, businesses that prioritize steady, manageable growth with healthy margins are far more sustainable than those chasing aggressive revenue goals at the expense of profitability.

The Illusion of Growth Without Profit

Too many businesses fall into the trap of believing that more sales automatically lead to more profit. The truth is, as your revenue grows, so do your expenses. This includes hiring more staff, investing in infrastructure, and managing higher operating costs. Without careful management, your expenses can easily outpace your revenue growth, leaving your business in a worse financial position.

Take the example of the business owner I met—his $10 million turnover and large staff count might look impressive on the surface, but with razor-thin margins, the reality is he’s working much harder for very little reward.

Conclusion: Don’t Let Revenue Fool You

As business owners, it’s important not to get caught up in vanity metrics like revenue. Yes, turnover matters, but it’s not the full story. Profitability and cash flow are what truly determine the health of your business. By focusing on profit and cash, you’ll ensure that your business is not just surviving but thriving.

At the end of the day, remember this:Revenue is vanity, profit is sanity, cash is reality.

If you want to build a financially sound business, keep your eye on what really matters—profit and cash flow.

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