Lesson #3: Let the revenue dictate the costs (not the costs dictate the revenue).
This is an article series based on lessons learned from my great mentor Lionel Morely Joel. Read the first article to understand the background and then dip in and out of the lessons as you please. Here I look at the danger of letting vanity drive your decisions rather than business sense.
After short period with Lionel as my mentor I started to become more confident (many in the office probably felt over confident), so I had an idea for a new publication. It would be my first launch; and show everyone that I knew how to launch a magazine. The ‘business plan’ was ready (well my first attempt at a business plan, Post-It note might have been nearer the mark).
After Lionel had read it he asked me where the revenue figure had come from.
“You said we needed a 20% return, so I worked out the costs then added a revenue figure that would make us the 20% margin,” I replied.
My launch was based on a producing a very high-end magazine; being my first launch of course I wanted to impress. So the revenue figure was pretty high.
“Is that revenue figure bankable or is it a stretch,” came the next question from Lionel.
“What do you mean?” I asked.
“Can you guarantee the revenue figure, or has it been based on what revenue you need to cover the costs, plus our 20%?”
I told him the revenue figure was entirely based on the costs so he rejected my business plan.
He told me to come back with a cost model that still showed the 20% margin but off a revenue figure I knew I could deliver. I realised the sense of what he was telling me: Yes I wanted great-looking, expensively produced product but the revenue I was forecasting was simply too optimistic .
So I did exactly as he asked. I determined the realistic revenue I could expect and then looked at every line of the costings and tightened up almost every cost. The only thing I did not compromise on was the content, but every other cost was taken back until I had cut them by about 30%.
It was no longer the Rolls Royce magazine I had dreamed up but the revenue figure was a much more achievable level and would cover all costs plus deliver a 20% return.
After six months the magazine was successfully launched; revenue still fell short but only by 5%, so we still made an acceptable margin. If we’d gone ahead with my original revenue figure, it would have been a bloody disaster.
What had I done wrong? I had allowed vanity to get the better of me. (There is even a term in publishing – “vanity publishing” – that refers to magazines that have more looks than business sense.) From that day on I have always let the bankable revenue dictate the costs – and not the costs dictate the revenue.
Next: Never fear those smarter than you.
If you could use someone to help you get a better grip on your business’ finances why not contact me for a no-strings chat to see if I’m a good fit to help you and your business.