When people ask me about starting or growing new companies, I hear a lot about income target, but little about profitability targets. What is a company worth if it only has revenue and doesn't have strong margins? Not much. Margin is a measure of a company's profitability: net profit margin = (Net Income / Revenue) x 100.
My company, University Parent Media (UPM), is the No. 1 college resource guide for millions of parents at over 200 institutions around the nation and is expanding rapidly. The company helps thousands of local and national advertisers effectively reach college parents in print and online. UPM is bootstrapped -- I borrowed money from a bank in 2007 and raised a small amount of funding in 2009 from three angel investors, but it has been running on revenue ever since.
Our objective is profitable growth. Each year, we aim for 20 percent income growth at a 20 percent margin. We could grow income by much more than 20 percent if we expanded the number of schools we work with. But then we would run out of cash to make payroll, even with sky-high revenues, and essentially kill our margins.
Very few startup companies talk about profitability, but it is one of the most important metrics. It may be difficult initially to achieve, but, make sure its on your radar as you build your business. Here are four ways you can grow your company's profitability:
- Keep a close watch on your expenses. In 2007, I signed a lease for a really nice office space that was way too large for realistic growth. We moved the company three times in three years, and I was tired of it. I knew we were going to keep growing quickly, and I wanted to find something that would work for us for three more years. Huge mistake. I probably had five times the amount of space I needed for three years. Nothing hurt more than signing the rent check each month, because I knew the money could have gone into hiring more salespeople so that we could keep growing revenue. Fortunately, we sublet the space to another company and only stayed in the building for a year and a half. This was an expensive lesson for me to learn. Be very cautious before you add a new expense to your monthly overhead. Ask yourself, "Is it a must-have right now? How will it affect my profitability?"
- Leave everything open to negotiation. Another way we have been able to generate additional margin is by negotiating every expense. Always work closely with your vendors to find the best deal. Think of it like booking airline flights and talk about "flexible dates" with your vendors. Maybe there's a certain time of year when they are slower than others, and you can time your orders to hit this window so that they can give you a better rate. Never make a deal without at least asking. Being small and flexible can often lead to major savings and in turn, major earnings through stronger margins.
- Learn the magical effects of shortening your receivables cycle. Because we're always growing, cash is tight. Last year, I thought we might need a line of credit to cover the difference in payables and receivables, even though we were running profitably. When I went through our forecast with the loan officer, he changed one of our assumptions. He moved the receivables cycle from 60-day to 45-days in our forecast. This had a dramatic effect. It meant we didn't need a line of credit. We offered our clients a discount if they paid early. We also gave the sales team incentive to bring in cash sooner rather than later by tying their commission payments to when the company got paid. We made collecting on invoices the top priority of our bookkeeper, and we retained a collections agency for any invoices the bookkeeper wasn't able to collect. We didn't need to borrow or raise money from outside investors because we figured out how to grow through our own receivables.
- Evaluate growth options through your forecast. With almost every decision, we plug the costs associated with the decision into our forecast and evaluate what the decision will do to margin. If something has a major negative impact on margin, we immediately reevaluate, and try to balance the impact through building revenue. This makes most decisions really easy. Either it improves our margin and we go for it, or the negative impact on margin makes us rethink the addition on the cost side.
For me, profitability is one of the most important metrics I view in growing University Parent. My eye is always on that number. I would rather grow profitably and at a reasonable pace than unprofitably, and quickly.
Sarah Schupp is the CEO and founder of University Parent Media (UPM). UPM is the No. 1 college resource guide for millions of parents at over 200 institutions around the nation and is expanding rapidly. The company helps thousands of local and national advertisers effectively reach college parents in print and online. She is a member of The Young Entrepreneur Council (YEC), an invite-only nonprofit organization comprised of the world's most promising young entrepreneurs. The YEC promotes entrepreneurship as a solution to unemployment and underemployment and provides entrepreneurs with access to tools, mentorship, and resources that support each stage of their business's development and growth.