At last week’s EO Accelerator education day on finance, the CPA put up a slide showing how a $3.5 million/year revenue consulting business could be exactly the same financially as a $20 million/year construction company (imagine the construction company flows through most of its revenues to sub-contractors). From a technology startup point of view, a similar story can be painted for a $10M revenue ecommerce business and a $5M revenue software company. It comes down to the cost of goods sold and the gross margins of the business.
Here’s how a $5M revenue software company and a $10M revenue ecommerce company might look similar financially:
- Ecommerce business – $10M revenue, $5M spent on inventory, $1M spent on outsourced warehouse and shipping, $4M left (margin)
- Software business – $5M revenue, $1M spent on customer acquisition (cost of goods sold), $4M left (margin)
Entrepreneurs enjoy talking about the number of employees they have as it’s a decent proxy for company size. Employee count and revenue are two very different things. The next time someone volunteers revenue size, consider their gross margins in making a comparison to other types of businesses.
What else? Do you consider gross margins when thinking about the size of a company?