Revenue or Expense: Which is Better?
Mar 03, 2014
I recently was looking on LinkedIn and I came across a discussion about what adds more to the bottom line: increasing revenue or decreasing expenses. This really is an age-old question and if you think about it systematically they both theoretically do the same. If you have $50,000 in revenues and $30,000 in expenses then you have $20,000 in profit. If you had $5,000 to revenue and decrease expense by $5,000 either way you now have $25,000 in profit.
The LinkedIn discussion thread talked about the various short-term and long-term effects of each. In my opinion, in the short-term it is often easier to reduce expenses. Increasing revenues often takes more resources, which in the short-term will most likely just increase your expenses. Things like marketing expenses, networking, etc are often quite necessary to increase revenues. Frequently, in the short-term, you can delay a purchase, cut costs, or even push production to do processes in a shorter time frame, thereby reducing costs.
However, in the long-run you can only put expenses off for so long. Eventually you have to purchase those items necessary for profitability and efficiency. You can only improve your processes by so much. If you increase your marketing efforts and push your sales team to bring in more revenue, you should be able to have a larger impact on your bottom line profitability. You are of course somewhat limited by your own capacity, but this still should be more overall.
In the end there are many things that can be done to improve overall profitability. The key is deciding which are the most important and would have the biggest impact. Often times this is looked at in the short-term, but looking at it in the long-term and having a good balance is key. Without increased revenues and market-share you could very quickly find yourself out of business.
Categories: Cost Accounting