I wrote a post some time ago titled: 30 Basic Points on Economics.
Point #10 was:
“Maximizing revenue and maximizing profit are not the same things.”
See, revenue matters.
But revenue is only half of the coin. The other half of the coin is expenses.
In short, revenue is the total amount of cash that is generated or earned. But revenue is not what a business keeps, expenses must be subtracted out.
Revenue – Expenses = Profit
In this, every business needs to remember the goal. What is the goal?
The goal is not to maximize revenue. Who cares what you bring in?
The goal is to maximize profit. You care about what goes in your pocket.
In a logic course, we would say:
“Maximizing revenue is necessary to maximizing profit – but it is not sufficient.”
In order to maximize profit – it is both necessary and sufficient – to simultaneously maximize revenue and minimize expenses.
Think about it in a simple way.
Who cares how many products you sold last year, or last quarter, at $20 per unit.
If your expenses are $20.01 per unit, you are still on the way out.
For most functioning businesses, maximizing revenue is just selling more units.
On the other hand, maximizing profits – in a practical sense – is usually a juggling act of ruthlessly minimizing fixed costs, charging a slightly higher price while serving a few fewer customers, and finding a great tax attorney.
Just remember:
The goal is not higher revenues.
The goal is higher profits.
