Grow your margins, not just your revenue or market share.
In other words, focus on profit metrics. Because sustainable growth and a path to exit come from total mastery of profit metrics, not blanket business expansion.
And remember that higher margins allow you to charge higher prices – and provide a better service – by reinvesting more capital into delivering a more superior offer.
Start by digging into the numbers, to identify where you make and lose money. So what exactly are these profit metrics? What you measure will be specific to your own business. But here are some of my favourite broad metrics you should be keeping an eye on:
🔸 Gross Profit Margin: how much profit is left after deducting the direct costs of producing your products or services. Ideally, aim for a gross margin above 50%.
🔸 Net Profit Margin: percentage of revenue that translates into bottom-line profit after accounting for all expenses. A healthy net margin is 10-20% for a typical business, but can be much higher or lower, accoreding to your business model.
🔸 EBITDA Margin: earnings before interest, taxes, depreciation, and amortization as a percentage of revenue. EBITDA strips out non-operational expenses to show core profitability.
🔸 Operating Cash Flow: cash generated from core business operations after accounting for expenses. Positive and growing operating cash flow is crucial.
🔸 Operating Expenses Ratio: operating expenses as a percentage of revenue. Keeping this ratio low drives profitability.
🔸 Customer Acquisition Cost: the costs to acquire each new customer. If you can nail this metric, you have a pathway to scaling up sustainably.
By mastering profit metrics and optimising your margins, you’re not just setting yourself up for a successful exit. You’re also building a business that’s built to last and will demonstrate resilience to potential acquirers.
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