Measuring your profit is much more important than tracking the amount of revenue for a business. But why?
Determining success can be a difficult thing in finance. Often companies have many different elements that determine whether or not it's been a positive period for the organization, but few are more important than generating money for the company.
It's one of the easiest ways to prove that the firm is performing well, but often people are focused on revenue, rather than the actual profit being made. This is a mistake that could be misleading decision makers and jeopardizing your achievements.
So why is profit far more important than revenue?
More accurate for the business
Looking at just the revenue can be an inaccurate way of judging if the company is 'succeeding' because it doesn't take wages or any other expenses into account. This can mean it often looks like the different departments are performing really well when actually you're not making much money for the business.
Instead, judging success by profit gives you a much more accurate view of the bigger picture, and how in-line you are with the overall business goals. This makes it easier to advise decision makers on where finances could be better invested or saved altogether.
Allows you to see where you're inefficient
Evaluating the company's performance based on profit allows you to better identify the areas where the organization is being inefficient. This enables you to clearly identify the places where improvements can be made, which is incredibly important when it comes to giving financial recommendations to decision makers.
This can also be a key part of employee retention. Of course, all employees are needed but some are more valuable than others. Looking at profit can allow you to see which employees are the most profitable, helping to guide counteroffers if your top talent get job offers elsewhere.
Encourages more growth
Increasing your profit encourages more sustainable growth for companies. Boosting revenue may get you more business but focusing on profit allows you to fuel competitive growth and gives you a much better chance of future growth. It's not too difficult to increase revenue by cutting your prices or offering promotions, but these don't increase your competitive advantage so don't lead to profitable growth.
Don't neglect revenue
Despite the fact that profits are more important in most instances for a company, don't neglect revenue. Tracking the total amount individual departments are generating can allow you to see new opportunities or when it would be apt to hire.
Insights for Professionals provide free access to the latest thought leadership from global brands. We deliver subscriber value by creating and gathering specialist content for senior professionals. To view more Finance content, click here.