Wednesday, July 6, 2016

Net Revenue Growth… the lifeblood of a thriving business

In a conversation earlier today with a long-term friend and colleague, we talked about the growth challenges of his business and the need for growth over the next few years.  While our focus was on the “net income” line of his company’s p&l, I blurted out (as I am known to do) that “net revenue growth is the lifeblood of a thriving business.”  Not only is that true related to my friends company / industry, it happens to be deeply true in EVERY business I have had the chance to work on over the past 30+ years!  Whether on Kleenex tissue, Breyers Ice Cream, Coca-Cola, Bolthouse Farms or across the varied businesses that I am consulting on today, the importance of healthy top-line growth has been a central and common theme across my career.

This idea of the importance and power of “growth” spans business and culture.  A great quote from our history sums it up well: 

"Without continual growth and progress, such words as improvement, achievement, and success have no meaning. "

Benjamin Franklin

While Franklin was not talking specifically about today’s corporate reality, this truth that there is no “success” or “achievement” without “growth and progress” is deeply true from my experience and important to remember.  If the ultimate indicator of a business’s health is “demand” as I have written in a previous essay (“Demand Drives Price”), then to have a thriving enterprise one needs to have a thriving revenue line on your p&l.

While so simple to discuss and comment on, this dynamic is no small feat across business realities.  I have worked in businesses without a thriving topline and you end up looking to cost reduction plans, “doing more with less” and organization restructurings to achieve quarterly and annual profit targets.  While effective in the short run, a business runs out of “cost centric” actions over time and ultimately does not thrive and succeed without solid revenue growth.

On the opposite dimension, I have recently worked in a high growth business environment, which also had its challenges.  In that situation, we have a tough time “keeping up” with the growth opportunities and more importantly “fulfilling” the growing demand of the business.  It was an eye-opener a few years ago to realize that our business had “outgrown” the actual number of warehouse doors of our primary production facility and that during the peak demand weeks between Thanksgiving and Superbowl, we didn't have enough “doors” to handle all the trucks picking up customer’s orders.  Yes, our demand growth was strong but if we couldn't “handle” the growth, then it would have been nothing more that temporary phenomenon!  (We did work our way to “handle the growth”, fodder for a future essay!!)

This idea of finding the right balance between a no growth environment (where you’re trying to “save your way to success”), and a high growth environment (where you can’t keep-up with the demand that you have created) is key to a business “thriving” over time.  Work hard to find that right balance year after year but never lose sight of the “G” word.  It’s all about “growth” and in my experience a healthy balanced growth of the revenue (demand) over time!

A quick comment on the use of the word “Net” in this essay’s title:  Recently I have worked with a number of consulting clients who are driving the heck out of their “Gross Revenue” line of their p&l with very little translating to the “Net Revenue” line.  They use discounts and allowances (“D&A”) to drive short-term growth which is OK if it translates to “Net Revenue Growth” over time.  I like to focus on the “Net Revenue” line of a business’s p&l and track it as THE key variable over time.

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