Check Revenue First

By Brad Thomason, CPA

 

I’ll share a page with you out of the consultant’s play book.  When asked to assess the prospects for some new venture or project I have a quick way of determining whether or not I’m going to put in the effort of a detailed analysis.  I check the revenue first.  If the revenue isn’t there, it’s usually pointless to continue the exercise.

Hardly insightful, I know.  But you’d be amazed how often people with “bright ideas” completely skip this step on the way to writing multi-chapter business plans and spending sleepless nights sorting through how they will possibly ever spend all of the money their great opportunity is going to make them.  Everything that follows for the rest of this post will be obvious.  But since it is so often missed, it might still be worth a read.

Once upon a time I had a brief chat with a guy at a wedding reception.  There was something good on the buffet and we were both standing there at the table doing the direct graze versus loading a plate and going to sit down.  Tacky, I know.  But my mother wasn’t there and I did not know many of the guests…

So he’s telling me about how he’s retiring soon and going to own a bed and breakfast.  He’s so excited.  The narrative he spins is obviously the product of months of dreaming.  He still has “a few details” to work out, but basically it’s a done-deal.  I ask him what sort of details, and he refers to some financial projections.  Caught up in his enthusiasm, I offer him some on-the-scene assistance.  He starts telling me about room counts, nightly rates, occupancy expectations, etc.  We talk staff costs, which it turns out are going to be very low because this is a venture that he and his wife are going into with 2 other couples.  It’s how they are going to fund their retirement.  We chat.  I do a little math while continuing to bomb the buffet.  But after a moment I get this sort of sick feeling in my stomach.  I stop eating.  I go back through the calculations, hoping I made an error.  Long story short, the revenue projections for this little project were like $60K a year.  That’s revenue, as in before any expenses.  And 3 couples are going to live off of that?

The conversation ended rather abruptly.  He was embarrassed for having put so much time and effort into dreaming up something that had very little chance of working as conceived.  I felt awful for being the messenger.  I never saw him again, but I always hoped he took the news I gave him and used it to re-tool the concept in a way that would work.

But the point for today is that in 5 minutes while standing at a buffet I modeled his revenue projections.  He could have done exactly the same thing himself months earlier.  If he had put that first thing first he would have either saved himself countless hours dreaming about a hollow dream; or he would have spent that time reworking the idea to make it viable.

Revenue is the first thing on an income statement for a reason.  If there is not sufficient revenue, it is irrelevant what is on the rest of the page.  The result will be disappointing.  It’s a simple mathematical fact.  No revenue equals no business.

Q:  An entrepreneur wants to start a new business that will supply him a 6-figure income.  If projected annual revenue for the new venture is less than $100K, what are his chances of achieving the goal?

A:  You don’t need me for this one…

Please check the revenue first.  Having enough revenue is by no means a guarantee that a venture will succeed.  And you may still need all sorts of pros to chime in and give you guidance in order to have something that can survive the trials of a start-up.  But before you do all of that check the revenue.

Because while having sufficient revenue is not a guarantee of success, it is almost universally the case that its absence will guarantee failure.

You can leave a response, or trackback from your own site.

Leave a Reply