KVI Series – Not All Revenue is Created Equal
Revenue is the lifeblood of your business, fueling the economic engine that moves your company forward.
We all realize that without it, values fall and businesses fail. However, more difficult to understand and identify is how certain revenues can decrease and harm your business’ value. From this comes the need for a thoughtful analysis of your client base and the components that make up your revenue. Yet, too few business owners have such criteria in place that monitors and acts to ensure new and existing business strengthens company value.
What these criteria look like varies drastically between industries. The goal, however, is the same: drill down to the value drivers that exist within the various revenue streams of the business. Know those influences and know how to strengthen them.
Revenue Value Drivers:
Profitability: A critical value driver of your revenue is the profitability associated with each customer or contract. To fully understand this, break down your Gross Profit per customer and compare this to industry and sector standards. Also, know the amount of Operating Expenses used to service a customer. From this you can understand when that customer’s generated revenue dips below those overhead costs, you are operating at a loss.
Ensuring a customer remains profitable will also involve controls to monitor costs and margins. Live job costing is a critical component to aid in margin tracking. And remember, lower margin work does not necessarily need to be turned down, however, it must be approached strategically and cautiously.
Concentration: This is a high-level analysis of the size and number of sources that make up your total revenue. It cannot be over-emphasized, high concentration, or having the bulk of your revenue from a smaller number of sources, adds substantial risk to the security of your business. Lower concentration is a value driver. While metrics vary substantially between industries a good goal is to keep your top customers well under 50% of your total business.
Diversity: Diversity goes deeper than concentration. It is an analysis of the characteristics of your customers and their needs.
- What are the industries your customers are in? Keep it varied to spread your risk among multiple industries.
- Where are the geographies your customers do business in? It should be large enough to mitigate risk, and dense enough to control cost and keep drive time and associated expenses down.
- What services will be needed? Here is another opportunity to spread risk while possibly expanding customers into overlapping services.
As the course of time brings expertise and recognition, it can be natural for a company to specialize, gravitating to a specific industry, area, or service type. However, strategic efforts must be made to achieve a healthy level of diversity within your revenue.
Recurring: Certain industries don’t easily lend themselves to repeat business. However, recurring revenue streams are great value drivers as they are predictable and incredibly risk-averse. Also, analyzing the frequency of current services can determine if there is opportunity to increase or add complimentary services.
Additional Factors: In addition to these metrics, there are several other drivers that can impact the value of your revenue.
Client retention rates will address the success of your customer relationships. Using a strong Customer Relationship Management system and Quality Assurance program will improve these metrics. These programs can also identify any trends needing correction.
Contract terms and expiries add to the sustainability of the work, and when coordinated, can strengthen revenue.
Labor and technology tracking can increase the productivity of your revenue streams.
Union agreements, minimum wage requirements and other government regulations have their own impact. As many of these factors are often beyond control, the key is to mitigate their impact where possible.
Find the Value Drivers
There are clear value drivers that exist within your revenue lines. It is important to identify these and maximize them. A drill down of each client and assignment, including direct costs and overhead associated with the project, will produce this knowledge. It will also highlight areas of concern, where improvements may be needed. Create a deliberate and strategic approach to this analysis. Apply these criteria to your new business opportunities. This will create an efficient means that can accelerate your organic growth. Out of this will come a sustainable and quality client base that increases the top and bottom lines, and improves company value.